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Registration No. 33-71056
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. 9
VEL II ACCOUNT
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Mary Eldridge, Secretary
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
___immediately upon filing pursuant to paragraph (b)
X on May 1, 2000 pursuant to paragraph (b)
---
___60 days after filing pursuant to paragraph (a)(1)
___on (date) pursuant to paragraph (a) (1)
___this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1999 was filed on or
before March 30, 2000.
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RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
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ITEM NO. OF
FORM N-8b-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
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1.....................Cover Page
2.....................Cover Page
3.....................Not Applicable
4 ....................Distribution
5.....................The Company, The VEL II Account
6.....................The VEL II Account
7.....................Not Applicable
8 ....................Not Applicable
9.....................Legal Proceedings
10....................Summary; Description of the Company, The VEL II Account and the Underlying Funds;
The Policy; Policy Termination and Reinstatement; Other Policy Provisions
11....................Summary; Allmerica Investment Trust; Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price International Series, Inc.; Delaware
Group Premium Fund, Inc.; Investment Objectives and Policy
12....................Summary; Allmerica Investment Trust; Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price International Series, Inc.; Delaware
Group Premium Fund, Inc.
13....................Summary; Allmerica Investment Trust; Variable Insurance Products Fund; Variable
Insurance Products Fund II; T. Rowe Price International Series, Inc.; Delaware
Group Premium Fund, Inc.; Investment Advisory Services to the Trust; Investment
Advisory Services to Variable Insurance Products Fund; Investment Advisory
Services to Variable Insurance Products Fund II; Investment Advisory Services to
T. Rowe Price International Series, Inc.; Investment Advisory Services to
Delaware Group Premium Fund, Inc.; Charges and Deductions
14 ...................Summary; Applying for a Policy
15....................Summary; Applying for a Policy; Premium Payments; Allocation of Net Premiums
16....................The VEL II Account; Allmerica Investment Trust; Variable Insurance Products Fund;
Variable Insurance Products Fund II; T. Rowe Price International Series, Inc.;
Delaware Group Premium Fund, Inc.; Premium Payments; Allocation of Net Premiums
17....................Summary; Policy Surrender; Partial Withdrawal; Charges and Deductions; Policy
Termination and Reinstatement
18....................The VEL II Account; Allmerica Investment Trust; Variable Insurance Products Fund;
Variable Insurance Products Fund II; T. Rowe Price International Series, Inc.;
Delaware Group Premium Fund, Inc.; Premium Payments
19....................Reports; Voting Rights
20....................Not Applicable
21....................Summary; Policy Loans; Other Policy Provisions
22....................Other Policy Provisions
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23....................Not Required
24....................Other Policy Provisions
25....................The Company
26....................Not Applicable
27....................The Company
28....................Directors and Principal Officers of the Company
29....................The Company
30....................Not Applicable
31....................Not Applicable
32....................Not Applicable
33....................Not Applicable
34....................Not Applicable
35....................Distribution
36....................Not Applicable
37....................Not Applicable
38....................Summary; Distribution
39....................Summary; Distribution
40....................Not Applicable
41....................The Company, Distribution
42....................Not Applicable
43....................Not Applicable
44....................Premium Payments; Policy Value and Cash Surrender Value
45....................Not Applicable
46....................Policy Value and Cash Surrender Value; Federal Tax Considerations
47....................The Company
48....................Not Applicable
49....................Not Applicable
50....................The VEL II Account
51....................Cover Page; Summary; Charges and Deductions; The Policy; Policy Termination and
Reinstatement; Other Policy Provisions
52....................Addition, Deletion or Substitution of Investment
53....................Federal Tax Considerations
54....................Not Applicable
55 ...................Not Applicable
56....................Not Applicable
57....................Not Applicable
58....................Not Applicable
59....................Not Applicable
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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL OR GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
VARI-EXCEPTIONAL LIFE
This Prospectus provides important information about Vari-Exceptional Life, an
individual or group flexible premium variable life insurance policy issued by
First Allmerica Financial Life Insurance Company to applicants who are Age 85
(currently 80 in New York) and under. The policies are funded through the VEL II
Account, a separate investment account of this Company, and a fixed-interest
account that is referred to as the General Account. PLEASE READ THIS PROSPECTUS
CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE.
The Separate Account is subdivided into Sub-Accounts. Each Sub-Account invests
exclusively in shares of one of the following Funds of Allmerica Investment
Trust, Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., and Delaware Group
Premium Fund:
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ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Fidelity VIP II Asset Manager Portfolio
Core Equity Fund
Equity Index Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Growth and Income Fund T. Rowe Price International Stock Portfolio
Select Investment Grade Income Fund
Government Bond Fund DELAWARE GROUP PREMIUM FUND
Money Market Fund DGPF International Equity Series
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THE PURPOSE OF THE POLICIES IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
THE POLICIES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE POLICIES
INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE ADVANTAGEOUS
TO REPLACE EXISTING INSURANCE WITH THE POLICY. THIS LIFE POLICY IS NOT: A BANK
DEPOSIT OR OBLIGATION; FEDERALLY INSURED; ENDORSED BY ANY BANK OR GOVERNMENTAL
AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
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CORRESPONDENCE MAY BE MAILED TO: DATED MAY 1, 2000
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8014 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8014 (508) 855-1000
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TABLE OF CONTENTS
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SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF POLICY FEATURES.................................. 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT AND THE
UNDERLYING FUNDS........................................... 20
INVESTMENT OBJECTIVES AND POLICIES.......................... 23
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 25
VOTING RIGHTS............................................... 25
THE POLICY.................................................. 27
Applying for the Policy................................... 27
Free-Look Period.......................................... 27
Conversion Privileges..................................... 28
Premium Payments.......................................... 28
Incentive Funding Discount................................ 29
Guaranteed Death Benefit Rider............................ 30
Paid-Up Insurance Option.................................. 31
Allocation of Net Premiums................................ 31
Transfer Privilege........................................ 32
Death Proceeds............................................ 33
Sum Insured Options....................................... 33
Change in Sum Insured Option.............................. 36
Change in the Face Amount................................. 36
Policy Value and Surrender Value.......................... 37
Death Proceeds Payment Options............................ 39
Optional Insurance Benefits............................... 39
Policy Surrender.......................................... 39
Partial Withdrawals....................................... 40
CHARGES AND DEDUCTIONS...................................... 41
Tax Expense Charge........................................ 41
Monthly Deduction from the Policy Value................... 41
Charges Against Assets of the Separate Account............ 43
Surrender Charge.......................................... 44
Possible Surrender Charge on a Face Amount Decrease....... 45
Charges on Partial Withdrawal............................. 46
Transfer Charges.......................................... 46
Charge for Increase in the Face Amount.................... 47
Other Administrative Charges.............................. 47
POLICY LOANS................................................ 47
Loan Interest............................................. 47
Repayment of Loans........................................ 48
Effect of Policy Loans.................................... 48
Policies Issued in Connection with TSA Plans.............. 48
POLICY TERMINATION AND REINSTATEMENT........................ 49
Termination............................................... 49
Reinstatement............................................. 50
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OTHER POLICY PROVISIONS..................................... 51
Policyowner............................................... 51
Beneficiary............................................... 51
Incontestability.......................................... 51
Suicide................................................... 51
Age and Sex............................................... 51
Assignment................................................ 51
Postponement of Payments.................................. 52
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 52
DISTRIBUTION................................................ 53
REPORTS..................................................... 54
LEGAL PROCEEDINGS........................................... 54
FURTHER INFORMATION......................................... 54
INDEPENDENT ACCOUNTANTS..................................... 54
FEDERAL TAX CONSIDERATIONS.................................. 54
The Company and the Separate Account...................... 55
Taxation of the Policy.................................... 55
Modified Endowment Contracts.............................. 56
MORE INFORMATION ABOUT THE GENERAL ACCOUNT.................. 57
General Description....................................... 57
General Account Values and Policy loans................... 57
The Policy................................................ 58
FINANCIAL STATEMENTS........................................ 58
APPENDIX A -- OPTIONAL BENEFITS............................. A-1
APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS................ B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS................................... C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... D-1
APPENDIX E -- PERFORMANCE INFORMATION....................... E-1
FINANCIAL STATEMENTS........................................ FIN-1
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SPECIAL TERMS
ACCUMULATION UNIT: a measure of your interest in a Sub-Account.
AGE: the Insured's age as of the nearest birthday measured from a Policy
anniversary.
BENEFICIARY: the person(s) designated by the Policyowner to receive the
insurance proceeds upon the death of the Insured.
COMPANY: First Allmerica Financial Life Insurance Company. "We," "our," "us,"
and "the Company" refer to First Allmerica Financial Life Insurance Company in
this Prospectus.
DATE OF ISSUE: the date set forth in the Policy used to determine the Monthly
Payment Date, Policy months, Policy years, and Policy anniversaries.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Sum Insured Option (Option 1 or
Option 2), less Debt outstanding at the time of the Insured's death, partial
withdrawals, if any, partial withdrawal charges, and any due and unpaid Monthly
Deductions. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Policy, unless the optional Guaranteed Death Benefit
Rider is in effect. If the Rider is in effect, the Death Proceeds will be the
greater of (a) the Face Amount as of the Final Premium Payment Date, or (b) the
Policy Value as of the date due proof of death for Option 2 and date of death
for Option 1 is received by the Company. This Rider may not be available in all
states.
DEBT: all unpaid Policy loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: an acknowledgment, signed by the Policyowner and returned to
the Company's Principal Office, that the Policyowner has received the Policy and
the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: information, including medical information
satisfactory to the Company, that is used to determine the Insured's Premium
Class.
FACE AMOUNT: the amount of insurance coverage applied for; the Face Amount of
each Policy is set forth in the specifications pages of the Policy.
FINAL PREMIUM PAYMENT DATE: the Policy anniversary nearest the Insured's 95th
birthday. The Final Premium Payment Date is the latest date on which a premium
payment may be made. After this date, the Death Proceeds equal the Surrender
Value of the Policy, unless the optional Guaranteed Death Benefit Rider is in
effect. The Net Death Benefit may be different before and after the Final
Payment Date. See DEATH PROCEEDS.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUIDELINE ANNUAL PREMIUM: the annual amount of premium that would be payable
through the Final Premium Payment Date of a Policy for the specified Sum
Insured, if premiums were fixed by the Company as to both timing and amount, and
monthly cost of insurance charges were based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Smoker or Non-smoker (Mortality Table B for unisex
Policies), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Policy and any Policy riders. The Sum Insured
Option 1 Guideline Annual Premium is used when calculating the maximum surrender
charge.
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GUIDELINE MINIMUM SUM INSURED: the minimum Sum Insured required to qualify the
Policy as "life insurance" under federal tax laws. The Guideline Minimum Sum
Insured varies by age; it is calculated by multiplying the Policy Value by a
percentage determined by the Insured's Age.
The percentage factor is a percentage that, when multiplied by the Certificate
Value, determines the minimum death benefit required under federal tax laws. For
both the Option 1 and the Option 2, the percentage factor is based on the
Insured's attained age, as set forth in GUIDELINE MINIMUM SUM INSURED TABLE in
SUM INSURED OPTIONS -- "GUIDELINE MINIMUM SUM INSURED" under THE POLICY.
INSURANCE AMOUNT AT RISK: the Sum Insured less the Policy Value.
LOAN VALUE: the maximum amount that may be borrowed under the Policy.
MINIMUM MONTHLY FACTOR: The Minimum Monthly Factor is a monthly premium amount
calculated by the Company and specified in the Policy. If, in the first 48
Policy months following Date of Issue or the effective date of an increase in
the Face Amount or of a Policy Change which causes a change in the Minimum
Monthly Factor:
- You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount or
Policy Change has been in force, and
- Debt does not exceed Policy Value less surrender charges, then
- the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
MONTHLY DEDUCTION: charges deducted monthly from the Policy Value prior to the
Final Premium Payment Date. The charges include the monthly cost of insurance,
the monthly cost of any benefits provided by riders, and the monthly
administrative charge.
MONTHLY PAYMENT DATE: the date on which the Monthly Deduction is deducted from
the Policy Value.
NET PREMIUM: an amount equal to the premium less a tax expense charge.
POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
rider, or a change in the Sum Insured Option.
POLICY VALUE: the total amount available for investment under a Policy at any
time. It is equal to the sum of (a) the value of the Accumulation Units credited
to a Policy in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Policy.
POLICYOWNER: the person, persons or entity entitled to exercise the rights and
privileges under the Policy.
PREMIUM CLASS: the risk classification that the Company assigns the Insured
based on the information in the application and any other Evidence of
Insurability considered by the Company. The Insured's Premium Class will affect
the cost of insurance charge and the amount of premium required to keep the
Policy in force.
PRINCIPAL OFFICE: the Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
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PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account the Policy
Value will be allocated. If you do not, the Company will allocate the deduction
or Policy Value among the General Account and the Sub-Accounts in the same
proportion that the Policy Value in the General Account and the Policy Value in
each Sub-Account bear to the total Policy Value on the date of deduction or
allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: a division of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust ("Trust"), a corresponding Portfolio of the Fidelity Variable Insurance
Products Fund ("Fidelity VIP") or the Fidelity Variable Insurance Products Fund
II ("Fidelity VIP II"), the T. Rowe Price International Stock Portfolio of T.
Rowe Price International Series, Inc. ("T. Rowe Price") or the International
Equity Series of the Delaware Group Premium Fund ("DGPF").
SUM INSURED: the amount payable upon the death of the Insured, before the Final
Premium Payment Date, prior to deductions for Debt outstanding at the time of
the Insured's death, partial withdrawals and partial withdrawal charges, if any,
and any due and unpaid Monthly Deductions. The amount of the Sum Insured will
depend on the Sum Insured Option chosen, but always will be at least equal to
the Face Amount.
SURRENDER VALUE: the amount payable upon a full surrender of the Policy. It is
the Policy Value less any Debt and applicable surrender charges.
UNDERLYING FUNDS (FUNDS): the Funds of the Allmerica Investment Trust, the
Portfolios of the Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II, the Portfolio of T. Rowe Price
International Series, Inc., and the Series of the Delaware Group Premium Fund,
which are available under the Policy.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Accumulation Unit values of the Sub-Accounts
are determined. Valuation Dates currently occur on each day on which the New
York Stock Exchange is open for trading, and on such other days (other than a
day during which no payment, partial withdrawal, or surrender of a Policy is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
affected materially.
VEL II ACCOUNT: a "Separate Account" of the Company to which the Policyowner may
make Net Premium allocations.
WRITTEN REQUEST: a request in writing, by the Policyowner, satisfactory to the
Company.
YOU OR YOUR: the Policyowner, as shown in the application or the latest change
filed with the Company.
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SUMMARY OF FEES AND CHARGES
POLICY FEES AND CHARGES
There are costs related to the insurance and investment features of the Policy.
Fees and charges to cover these costs are deducted in several ways.
DEDUCTIONS FROM EACH PREMIUM
A tax expense charge will be deducted from each premium payment to compensate
the Company for premium taxes imposed by various states and local jurisdictions
and for federal taxes imposed for deferred acquisition cost ("DAC") taxes. The
tax expense charge is currently 2 1/4% but may be increased or decreased to
reflect changing tax rates. See CHARGES AND DEDUCTIONS -- "Tax Expense Charge."
MONTHLY DEDUCTIONS FROM THE POLICY VALUE
On the Date of Issue and each Monthly Payment Date, certain charges ("Monthly
Deductions") will be deducted from the Policy Value. The Monthly Deduction
consists of a charge for cost of insurance, a charge for administrative
expenses, and a charge for the cost of any additional benefits provided by
rider. You may instruct the Company to deduct the Monthly Deduction from one
specific Sub-Account. If you do not, the Company will make a Pro-Rata Allocation
of the charge. No Monthly Deductions are made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy
Value."
The MONTHLY COST OF INSURANCE CHARGE is determined by multiplying the Insurance
Amount at Risk for each Policy month by the applicable cost of insurance rate or
rates. The Insurance Amount at Risk will be affected by any decreases or
increases in the Face Amount.
A MONTHLY ADMINISTRATIVE CHARGE of $5 per month is made for administrative
expenses. The charge is designed to reimburse the Company for the costs
associated with issuing and administering the Policies, such as processing
premium payments, Policy loans and loan repayments, changes in Sum Insured
Option, and death claims. These charges also help cover the cost of providing
annual statements and responding to Policyowner inquiries.
As noted above, certain ADDITIONAL INSURANCE RIDER BENEFITS are available under
the Policy for an additional monthly charge. See APPENDIX A -- OPTIONAL
BENEFITS.
DEDUCTIONS FROM THE SEPARATE ACCOUNT
A daily charge currently equivalent to an effective annual rate of 0.80% of the
average daily net asset value of each Sub-Account of the Separate Account is
imposed to compensate the Company for its assumption of certain mortality and
expense risks and for administrative costs associated with the Separate Amount.
The rate is 0.65% for the mortality and expense risk and 0.15% for the Separate
Account administrative charge. The administrative charge is eliminated after the
tenth Policy year. See CHARGES AND DEDUCTIONS -- "CHARGES AGAINST ASSETS OF THE
SEPARATE ACCOUNT."
The Underlying Funds also incur certain expenses which are reflected in the net
asset value of the Sub-Accounts. See INVESTMENT OPTIONS -- "Charges of the
Underlying Investment Companies," below.
OTHER CHARGES (NON-PERIODIC)
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge is assessed at the time of each partial withdrawal to
reimburse the Company for the cost of processing the withdrawal. The transaction
charge is the smaller of 2% of the amount withdrawn, or $25. In addition to the
partial withdrawal transaction charge, a partial withdrawal charge also may be
made under
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certain circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial
Withdrawal." The transaction fee applies to all partial withdrawals including a
Withdrawal without a surrender charge.
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount, a charge of $40 will be deducted from the
Policy Value. This charge is designed to reimburse the Company for underwriting
and administrative costs associated with the increase. See THE POLICY -- "Change
in the Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Increase in the
Face Amount."
TRANSFER CHARGE
The first 12 transfers of Policy Value in a Policy year will be free of charge.
Thereafter, with certain exceptions, a transfer charge of $10 will be imposed
for each transfer request to reimburse the Company for the costs of processing
the transfer. See THE POLICY -- "Transfer Privilege" and CHARGES AND
DEDUCTIONS -- "Transfer Charges."
SURRENDER CHARGES
At any time that the Policy is in effect, the Policyowner may elect to surrender
the Policy and receive its Surrender Value. A surrender charge is calculated
upon issuance of the Policy and upon each increase in the Face Amount. The
duration of the surrender charge is 15 years for issue Ages 0 through 50,
grading down to 10 years for issue Ages 55 and above. The surrender charge is
imposed only if, during its duration, you request a full surrender or a decrease
in the Face Amount.
SURRENDER CHARGE ON THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Policy is equal to
the sum of (a) plus (b), where (a) is a DEFERRED ADMINISTRATIVE CHARGE, and
(b) is a DEFERRED SALES CHARGE.
The DEFERRED ADMINISTRATIVE CHARGE is $8.50 per thousand dollars of the initial
Face Amount or of an increase in the Face Amount. The charge is designed to
reimburse the Company for administrative costs associated with product research
and development, underwriting, Policy administration, decreasing the Face
Amount, and surrendering a Policy. Because the maximum surrender charge reduces
by 0.5% or more per month (depending on issue Age) after the 40th Policy month
from the Date of Issue or the effective date of an increase in the Face Amount,
in certain situations some or all of the deferred administrative charge may not
be assessed upon surrender of the Policy. The deferred sales charge is equal to
49% of premiums received up to a maximum number of Guideline Annual Premiums
that vary by issue Age. This maximum number varies from 1.660714 (for Ages 0
through 55) to 0.948980 (for Ages 80 and above). See THE POLICY -- "Policy
Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In accordance with state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per $1,000 of the initial
Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
If you surrender the Policy during the first two Policy years following the Date
of Issue, before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above. The deferred sales charge, however, will not exceed
29% of premiums received, up to one Guideline Annual Premium, plus 9% of
premiums received that are in excess of one Guideline Annual Premium, but less
than the maximum number of Guideline Annual Premiums subject to the deferred
sales charge. See THE POLICY -- "Policy Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
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SURRENDER CHARGES FOR INCREASES IN THE FACE AMOUNT
A separate surrender charge will apply to, and is calculated for, each increase
in the Face Amount. The maximum surrender charge for the increase is equal to
the sum of (a) plus (b), where (a) is the deferred administrative charge, and
(b) is a deferred sales charge. The deferred administrative charge is equal to
$8.50 per thousand dollars of increase. The deferred sales charge is equal to
49% of premiums associated with the increase, up to a maximum number of
Guideline Annual Premiums that varies by issue Age. This maximum number varies
from 1.660714 (for Ages 0 through 55) to 0.948980 (for Ages 80 and above).
In accordance with state insurance regulations, the amount of the surrender
charge will not exceed a specified amount per $1,000 of increase, as indicated
in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. This maximum
surrender charge remains level for the first 40 Policy months following the
increase, and reduces by 0.5% or more per month (depending on Age at increase)
thereafter. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. The
actual surrender charge with respect to the increase may be less than the
maximum. See THE POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
SURRENDER CHARGES ON DECREASES IN THE FACE AMOUNT
In the event of a decrease in the Face Amount, the surrender charge imposed is
proportional to the charge that would apply to a full Policy surrender. See THE
POLICY -- "Policy Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge,"
and APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
OTHER CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. No such charges currently are imposed, and any such
charge is guaranteed not to exceed $25. See CHARGES AND DEDUCTIONS -- "Other
Administrative Charges."
CHARGES OF THE UNDERLYING INVESTMENT COMPANIES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1999.
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MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER ANY (AFTER ANY (AFTER ANY
UNDERLYING FUND VOLUNTARY WAIVERS) APPLICABLE REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- --------------- ------------------ -------------------------- -----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund..... 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation
Fund............................. 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund..... 0.90% 0.07% 0.97%(1)(2)
Select Emerging Markets Fund...... 1.35% 0.57% 1.92%(1)(2)
Select International Equity
Fund............................. 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity
Series........................... 0.83%(4) 0.12% 0.95%(4)
Fidelity VIP Overseas Portfolio... 0.73% 0.18% 0.91%(3)
T. Rowe Price International Stock
Portfolio........................ 1.05% 0.00% 1.05%
Select Growth Fund................ 0.78% 0.05% 0.83%(1)(2)
Select Strategic Growth Fund...... 0.85% 0.35% 1.20%(1)(2)
Core Equity Fund.................. 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio..... 0.58% 0.08% 0.66%(3)
Equity Index Fund................. 0.28% 0.07% 0.35%(1)
Select Growth and Income Fund..... 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP Equity-Income
Portfolio........................ 0.48% 0.09% 0.57%(3)
Fidelity VIP II Asset Manager
Portfolio........................ 0.53% 0.10% 0.63%(3)
Fidelity VIP High Income
Portfolio........................ 0.58% 0.11% 0.69%
Select Investment Grade Income
Fund............................. 0.43% 0.07% 0.50%(1)
Government Bond Fund.............. 0.50% 0.12% 0.62%(1)
Money Market Fund................. 0.24% 0.05% 0.29%(1)
</TABLE>
* Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised. The
Management Fee and Total Fund Expense ratios shown in the table above have been
adjusted to assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income
Fund, and Government Bond Fund, and 0.60% for Money Market Fund and Equity Index
Fund. The total operating expenses of these Funds of the Trust were less than
their respective expense limitations throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-advisor.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions, total annual fund operating expenses
were 1.01% for Select International Equity Fund, 1.88% for Select Emerging
Markets, 0.83% for Select Aggressive Growth Fund, 0.88% for Select Value
Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for Select Strategic
Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth and Income
Fund.
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<PAGE>
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds', or
Fidelity Management & Research Company on behalf of certain funds', custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.56% for the Fidelity VIP Equity-Income Portfolio; 0.62%
for the Fidelity VIP II Asset Manager Portfolio and 0.65% for the Fidelity VIP
Growth Portfolio.
(4) The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
11
<PAGE>
SUMMARY OF POLICY FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. If you are considering the purchase of this
product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Policy, together with its attached application, constitutes the entire agreement
between you and the Company.
Within limits, you may choose the amount of initial premium desired and the
initial Sum Insured. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Policy's Surrender Value, or the Policy may be fully
surrendered at any time, subject to certain limitations. Because of the
substantial nature of the surrender charge, the Policy is not suitable for
short-term investment purposes. A Policyowner contemplating surrender of a
Policy should pay special attention to the limitation of deferred sales charges
on surrenders in the first two years following issuance or Face Amount increase.
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value also will be adjusted for other factors, including the amount
of charges imposed. A Policy will remain in effect so long as the Policy Value
less any surrender charges and less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Policy. The Policy Value
may decrease to the point where the Policy will lapse and provide no further
death benefit without additional premium payments, unless the optional
Guaranteed Death Benefit Rider is in effect.
If the Policy is in effect at the death of the Insured, the Company will pay a
death benefit (the "Death Proceeds") to the Beneficiary. Prior to the Final
Premium Payment Date, the Death Proceeds equal the Sum Insured, less any Debt,
partial withdrawals, and any due and unpaid charges. You may choose either Sum
Insured Option 1 (the Sum Insured is fixed in amount) or Sum Insured Option 2
(the Sum Insured includes the Policy Value in addition to a fixed insurance
amount). The Policyowner has the right to change the Sum Insured Option, subject
to certain conditions. A Guideline Minimum Sum Insured, equivalent to a
percentage of the Policy Value, will apply if greater than the Sum Insured
otherwise payable under Option 1 or Option 2.
In certain circumstances, the Policy may be considered a "modified endowment
contract." Under the Internal Revenue Code (the "Code"), any policy loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
ABOUT THE POLICY
The Policy allows you to make premium payments in any amount and frequency,
subject to certain limitations. As long as the Policy remains in force, it will
provide for:
- life insurance coverage on the named Insured,
- Policy Value,
- surrender rights and partial withdrawal rights,
- loan privileges, and
- in some cases, additional insurance benefits available by rider for an
additional charge.
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<PAGE>
LIFE INSURANCE
The Policy is a life insurance contract with death benefits, Policy Value, and
other features traditionally associated with life insurance. The Policy is
"variable" because the Policy Value will increase or decrease depending on the
investment experience of the Sub-Accounts of the Separate Account. Under some
circumstances, the Death Benefit may vary with the investment experience of the
Sub-Accounts.
CONDITIONAL INSURANCE AGREEMENT
If at the time of application you make a payment equal to at least one Minimum
Monthly Factor for the Policy as applied for, the Company will provide
conditional insurance equal to the amount of insurance applied for, subject to
the terms of the Conditional Insurance Agreement. If you do not wish to make any
payment at the time of application, insurance coverage will not be in force
until delivery of the Policy and payment of sufficient premium to place the
insurance in force.
If any premiums are paid prior to the issuance of the Policy, such premiums will
be held in the General Account. If your application is approved and the Policy
is issued and accepted, the initial premiums held in the General Account will be
credited with interest at a specified rate beginning not later than the date of
receipt of the premiums at the Principal Office. IF THE POLICY IS NOT ISSUED AND
ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
The Policies may be issued in connection with Internal Revenue Service Code
("Code") Section 403(b) tax-sheltered annuity plans ("TSA Plans") of certain
public school systems and organizations that are tax exempt under
Section 501(c)(3) of the Code. A Policy issued in connection with a TSA Plan
will be endorsed to reflect the restrictions imposed on assignment, premium
payments, withdrawals, and surrender under Code Section 403(b). The Policyowner
may terminate the endorsement at any time. However, the termination of the
endorsement may cause the Policy to fail to qualify under Code Section 403(b).
See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS"
and POLICY LOANS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."
ALLOCATION OF INITIAL PREMIUMS
Net premiums may be allocated to one or more Sub-Accounts of the Separate
Account, to the General Account, or to any combination of Accounts. You bear the
investment risks of amounts allocated to the Sub-Accounts. Allocations may be
made to no more than 20 Sub-Accounts at any one time. The minimum allocation is
1% of Net Premium. All allocations must be in whole numbers and must total 100%.
See THE POLICY -- "Allocation of Net Premiums." Premiums allocated to the
General Account will earn a fixed rate of interest. Net premiums and minimum
interest are guaranteed by the Company. For more information, see MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
FREE-LOOK PERIOD -- The Policy provides for an initial Free-Look Period. You may
cancel the Policy by mailing or delivering it to the Principal Office or to an
agent of the Company on or before the latest of:
- 45 days after the application for the Policy is signed,
- 10 days after you receive the Policy (or, if required by state law, the
longer period indicated in the Policy), or
- 10 days after the Company mails or personally delivers a Notice of
Withdrawal Rights to you.
- 60 days after you receive the Policy, if the Policy was purchased in New
York as a replacement for an existing policy.
When you return the Policy, the Company will mail a refund to you within seven
days. The refund of any premium paid by check may be delayed until the check has
cleared your bank.
13
<PAGE>
Where required by state law, the refund will equal the premiums paid. In all
other states or if you purchased the Policy in New York as a replacement, the
refund will equal the sum of:
(1) the difference between the premium, including fees and charges paid, and
any amount allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
The amount refunded in (1) above includes any premiums allocated to the General
Account. A free-look privilege also applies after a requested increase in the
Face Amount. See THE POLICY -- "Free-Look Period."
CONVERSION PRIVILEGES -- During the first 24 Policy months after the Date of
Issue, subject to certain restrictions, you may convert the Policy to a fixed
flexible premium adjustable life insurance policy by simultaneously transferring
all accumulated value in the Sub-Accounts to the General Account and instructing
the Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24 Policy months after the date of an
increase in the Face Amount. Where required by state law, and at your request,
the Company will issue a flexible premium adjustable life insurance policy to
you. The new policy will have the same Face Amount, issue Age, Date of Issue,
and Premium Class as the original Policy. See THE POLICY -- "Conversion
Privileges."
FLEXIBLE PREMIUM
The Policy is a "flexible premium" policy because, unlike traditional insurance
policies, there is no fixed schedule for premium payments. You may vary the
frequency and amount of future premium payments, subject to certain limits,
restrictions and conditions set by Company standards and federal tax laws.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause the Policy to lapse. Because of the variable nature of the Policy, making
planned premium payments does not guarantee that the Policy will remain in
force. Thus, you may, but are not required to, pay additional premiums. However,
if the optional Guaranteed Death Benefit Rider is in effect, certain minimum
premium payment tests must be met. This Rider may not be available in all
states.
The Policy will remain in force until the Surrender Value is insufficient to
cover the next Monthly Deduction and loan interest accrued, if any, and a grace
period of 62 days has expired without adequate payment being made by you. During
the first 48 Policy months after the Date of Issue or the effective date of an
increase in the Face Amount, the Policy will not lapse if the total premiums
paid less the Debt, partial withdrawals and withdrawal charges are equal to or
exceed the sum of the Minimum Monthly Factors for the number of months the
Policy, increase, or a Policy Change which causes a change in the Minimum
Monthly Factor has been in force. Even during these periods, however, making
payments at least equal to the Minimum Monthly Factor will not prevent the
Policy from lapsing if the Debt equals or exceeds the Policy Value less
surrender charges.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If, in the first 48 Policy months following Date of
Issue or the effective date of an increase in the Face Amount or of a Policy
Change which causes a change in the Minimum Monthly Factor:
- You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount or
Policy Change has been in force, and
- Debt does not exceed Policy Value less surrender charges, then
14
<PAGE>
- the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
However, if the optional Guaranteed Death Benefit Rider is in effect, the
Company (a) guarantees that the Policy will not lapse, regardless of the
investment performance of the Variable Account, and (b) provides a guaranteed
death benefit. See THE POLICY -- "Guaranteed Death Benefit Rider."
PARTIAL WITHDRAWALS
After the first Policy year, you may make partial withdrawals in a minimum
amount of $500 from the Policy Value. Under Option 1, the Face Amount is reduced
by the amount of the partial withdrawal. A partial withdrawal will not be
allowed under Option 1 if it would reduce the Face Amount below $40,000.
A partial withdrawal charge, which is described in CHARGES AND DEDUCTIONS --
"Charges on Partial Withdrawal," will be assessed to reimburse the Company for
the cost of processing each partial withdrawal. A partial withdrawal charge also
may be imposed upon a partial withdrawal. Generally, amounts withdrawn during
each Policy year in excess of 10% of the Policy Value ("excess withdrawal") are
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Policy's outstanding surrender
charge will be reduced by the amount of the partial withdrawal charge deducted.
See THE POLICY -- "Partial Withdrawals" and CHARGES AND DEDUCTIONS -- "Charges
on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Policy Value. The total amount you may borrow is the
Loan Value. Loan Value in the first Policy year is 75% of an amount equal to the
Policy Value less surrender charge, Monthly Deductions, and interest on Policy
loan to the end of the Policy year. Thereafter, Loan Value is 90% of an amount
equal to the Policy Value less the surrender charge.
Policy loans will be allocated among the General Account and the Sub-Accounts in
accordance with your instructions. If no allocation is made by you, the Company
will make a Pro-Rata Allocation among the Accounts. In either case, Policy Value
equal to the Policy loan will be transferred from the appropriate Sub-Accounts
to the General Account, and will earn monthly interest at an effective annual
rate of at least 6%. Therefore, a Policy loan may have a permanent impact on the
Policy Value even though it eventually is repaid. Although the loan amount is a
part of the Policy Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Policy loans will bear interest at a fixed rate of 8% per year, due and payable
in arrears at the end of each Policy year. If interest is not paid when due, it
will be added to the loan balance. Policy loans may be repaid at any time. You
must notify the Company if a payment is a loan repayment; otherwise, it will be
considered a premium payment. Any partial or full repayment of Debt by you will
be allocated to the General Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See POLICY LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time. If
this option has been selected, after the tenth policy anniversary the Policy
Value in the General Account equal to the loan amount will be credited with
interest at an effective annual yield of at least 7.5%. The Company's current
position is to credit a rate of interest equal to the rate being charged for the
preferred loan.
15
<PAGE>
There is some uncertainty as to the tax treatment of preferred loans, which may
be treated as a taxable distribution from the Policy. See FEDERAL TAX
CONSIDERATIONS, "Policy Loans." Consult a qualified tax adviser (and see FEDERAL
TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL STATES.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
Loans from Policies issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code are subject to additional restrictions. See
POLICY LOANS -- "Policies Issued in Connection with TSA Plans."
POLICY LAPSE AND REINSTATEMENT
Except as otherwise provided in the optional Guaranteed Death Benefit Rider, the
failure to make premium payments will not cause a Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any; or
(b) Debt exceeds Policy Value less surrender charges.
A 62-day grace period applies to each situation.
Even if the situation described in (a) above exists, the Policy will not lapse
if you meet the so-called "Minimum Monthly Factor" test. The Minimum Monthly
Factor test is only used to determine whether the Policy will enter the grace
period during the first 48 months or within 48 months following an increase in
the Face Amount. Under the Minimum Monthly Factor test, the Company determines
two amounts:
- the sum of the payments your have made, MINUS any Policy loans,
withdrawals and withdrawal charges.
- the amount of the Minimum Monthly Factor (the amount is shown on page 5 of
the Policy) MULTIPLIED by the number of months the Policy has been in
force or the number of months which have elapsed since the last increase
in the Face Amount.
The Company then compares the first amount to the second amount. The Policy will
not enter the grace period if the first amount is greater than the second
amount. If the Policy lapses, it may be reinstated within three years of the
date of default (but not later that the Final Premium Payment Date). In order to
reinstate, you must pay the reinstatement premium and provide satisfactory
Evidence of Insurability. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement. See POLICY TERMINATION AND REINSTATEMENT.
In addition, if the Guaranteed Death Benefit rider is in effect, the Company
guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account. However, the Policy may lapse under certain
circumstance. See THE POLICY -- "Guaranteed Death Benefit Rider."
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment under the Policy
at any time. It is the sum of the value of all Accumulation Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account credited to the Policy. The Policy Value reflects the amount and
frequency of Net Premiums paid, charges and deductions imposed under the Policy,
interest credited to accumulations in the General Account, investment
performance of the Sub-Accounts to which Policy Value has been allocated, and
partial withdrawals. The Policy Value may be relevant to the computation of the
Death Proceeds. You bear the entire investment risk for amounts allocated to the
Separate Account. The Company does not guarantee a minimum Policy Value.
16
<PAGE>
The Surrender Value will be the Policy Value less any Debt and applicable
surrender charges. The Surrender Value is relevant, for example, to the
continuation of the Policy and in the computation of the amounts available upon
partial withdrawals, Policy loans or surrender.
DEATH PROCEEDS
The Policy provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Sum Insured, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Policy month in which
the Insured dies.
Two Sum Insured Options are available. Under Option 1, the Sum Insured is the
greater of the Face Amount of the Policy or the Guideline Minimum Sum Insured.
Under Option 2, the Sum Insured is the greater of the Face Amount of the Policy
plus the Policy Value or the Guideline Minimum Sum Insured. The Guideline
Minimum Sum Insured is equivalent to a percentage (determined each month based
on the Insured's Age) of the Policy Value. On or after the Final Premium Payment
Date, the Death Proceeds will equal the Surrender Value, unless the optional
Guaranteed Death Benefit Rider is in effect. See THE POLICY -- "Death Proceeds"
and "Guaranteed Death Benefit Rider."
The Death Proceeds under the Policy may be received in a lump sum or under one
of the Payment Options described in the Policy. See APPENDIX B -- DEATH PROCEEDS
PAYMENT OPTIONS.
FLEXIBILITY TO ADJUST SUM INSURED
Subject to certain limitations, you may adjust the Sum Insured, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Policy. Any change in the Face
Amount will affect the monthly cost of insurance charges and the amount of the
surrender charge. If the Face Amount is decreased, a pro-rata surrender charge
may be imposed. The Policy Value is reduced by the amount of the charge. See THE
POLICY -- "Change in the Face Amount."
The minimum increase in the Face Amount is $10,000, and any increase also may
require additional Evidence of Insurability. The increase is subject to a
"free-look period" and, during the first 24 months after the increase, to a
conversion privilege. See THE POLICY -- "Free-Look Period" and "Conversion
Privileges."
ADDITIONAL INSURANCE BENEFITS
You have the flexibility to add additional insurance benefits by rider. These
include the Waiver of Premium Rider, Accidental Death Benefit Rider, Guaranteed
Insurability Rider, Other Insured Rider, Children's Insurance Rider, Exchange
Option Rider, Living Benefits Rider, and Guaranteed Death Benefit Rider. See
APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the Policy
Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from the Policy Value."
INVESTMENT OPTIONS
The Policy permits Net Premiums to be allocated either to the General Account or
to the Separate Account. The Separate Account currently is comprised of 20
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of the Allmerica Investment Trust ("Trust") managed by Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), Fidelity Variable Insurance
Products Fund ("Fidelity VIP") and Fidelity Variable Insurance Products Fund II
("Fidelity VIP II") managed by Fidelity Management & Research Company, T. Rowe
Price International Series Inc. ("T. Rowe Price") managed by Rowe Price-Fleming
International, Inc., with respect to the International Stock Portfolio, or the
Delaware Group Premium Fund, ("DGPF") managed by Delaware International
Advisers, Ltd. with respect to the International Equity Series. The Policy
permits you to transfer Policy Value among the available Sub-Accounts and
between the Sub-Accounts and the General Account, subject to certain limitations
described under THE
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POLICY -- "Transfer Privilege." The Trust, Fidelity VIP, Fidelity VIP II,
T. Rowe Price, and DGPF are open-end, diversified series management investment
companies. The following Underlying Funds are available under the Policy:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Fidelity VIP II Asset Manager Portfolio
Core Equity Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Equity Index Fund T. Rowe Price International Stock Portfolio
Select Growth and Income Fund
Select Investment Grade Income Fund DELAWARE GROUP PREMIUM FUND
Government Bond Fund DGPF International Equity Series
Money Market Fund
</TABLE>
Each of the Underlying Funds has its own investment objectives. Certain
Underlying Funds, however, have investment objectives similar to certain other
Underlying Funds.
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved.
TAXATION OF THE POLICIES
The Policy generally is subject to the same federal income tax treatment as a
conventional fixed benefit life insurance Policy. Under current tax law, to the
extent there is no change in benefits and the Policy is not a modified endowment
contract, the Policyowner will be taxed on Policy Value withdrawn from the
Policy only to the extent that the amount withdrawn exceeds the total premiums
paid. Withdrawals in excess of premiums paid will be treated as ordinary income.
During the first 15 Policy years, however, an "interest-first" rule applies to
any distribution of cash that is required under Section 7702 of the Code because
of a reduction in benefits under the Policy. Death Proceeds under the Policy are
generally excludable from the gross income of the Beneficiary, but in some
circumstances the Death Proceeds or the Policy Value may be subject to federal
estate tax. See FEDERAL TAX CONSIDERATIONS -- "Taxation of the Policy."
A Policy may be considered a "modified endowment contract" if it fails a
"seven-pay" test. The Policy fails to satisfy the seven-pay test if the
cumulative premiums paid under the Policy at any time during the first seven
Policy years, or within seven years of a material change in the policy, exceed
the sum of the net level premiums that would have been paid had the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. If the Policy is considered a modified endowment contract, all
distributions (including Policy loans, partial withdrawals, Policy surrenders or
assignments) will be taxed on an "income-first" basis. With certain exceptions,
an additional 10% penalty will be imposed on the portion of any distribution
that is includible in income. For more information, see FEDERAL TAX
CONSEQUENCES -- "Modified Endowment Contracts."
------------------------
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This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. The Prospectus and the Policy provide further
detail. The Policy provides insurance protection for the named beneficiary. The
Policy and its attached application or enrollment form are the entire agreement
between you and the Company.
THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU
ALREADY OWN A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
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DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT
AND THE UNDERLYING FUNDS
THE COMPANY
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. As of December 31, 1999, the Company and its subsidiaries had
over $25 billion in combined assets and over $43 billion of life insurance in
force. The Company is a wholly owned subsidiary of Allmerica Financial
Corporation ("AFC"). The Company's principal office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, telephone 508-855-1000 ("Principal
Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Policy are set aside in the
Separate Account, and are kept separate from the general assets of the Company.
Under Massachusetts law, assets equal to the reserves and other liabilities of
the Separate Account may not be charged with any liabilities arising out of any
other business of the Company. The Separate Account currently has
20 Sub-Accounts. Each Sub-Account is administered and accounted for as part of
the general business of the Company, but the income, capital gains, or capital
losses of each Sub-Account are allocated to such Sub-Account, without regard to
other income, capital gains or capital losses of the Company or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of one of the following investment companies:
- Allmerica Investment Trust
- Fidelity Variable Insurance Products Fund
- Fidelity Variable Insurance Products Fund II
- T. Rowe Price International Series, Inc.
- Delaware Group Premium Fund
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund generally have no
effect on the investment performance of another Underlying Fund. Shares of each
Underlying Fund are not offered to the general public but solely to separate
accounts of life insurance companies, such as the Separate Account.
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Each Sub-Account has two subdivisions. One subdivision applies to a Policy
during the first ten Policy years, which are subject to the Separate Account
administrative charge. See CHARGES AND DEDUCTIONS -- "Charges Against Assets of
the Separate Account." Thereafter, such a Policy automatically is allocated to
the second subdivision to account for the elimination of the Separate Account
administrative charge.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Sub-Accounts and the Separate Account.
THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see "CHARGES OF THE UNDERLYING INVESTMENT COMPANIES
under the SUMMARY OF FEES AND CHARGES section. The prospectuses of the
Underlying Funds also contain information regarding fees for advisory services
and should be read in conjunction with this prospectus.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust ("Trust") is an open-end, diversified, management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds.
The Trust was established by the Company as a Massachusetts business trust on
October 11, 1984, for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by the Company, or other
insurance companies. Thirteen investment portfolios of the Trust ("Funds") are
available under the Policy, each issuing a series of shares: Select Aggressive
Growth Fund, Select Capital Appreciation Fund, Select Value Opportunity Fund,
Select Emerging Markets Fund, Select International Equity Fund, Select Growth
Fund, Select Strategic Growth Fund, Core Equity Fund, Equity Index Fund, Select
Growth and Income Fund, Select Investment Grade Income Fund, Government Bond
Fund and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment manager of the Trust. AFIMS, which is a wholly-owned subsidiary of
Allmerica Financial, has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. The Trustees have
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into a management agreement with AFIMS
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs administrative and
management services for the Trust, furnishes to the Trust all necessary office
space, facilities and equipment, and pays the compensation, if any, of officers
and Trustees who are affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act"),
- Other fees payable to the SEC,
- Independent public accountant, legal and custodian fees,
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions,
- Fees and expenses of the Trustees who are not affiliated with AFIMS,
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
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Under the Management Agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees. Under
each Sub-Adviser Agreement, the Sub-Adviser is authorized to engage in portfolio
transactions on behalf of the Fund, subject to the Trustee's instructions. The
Sub-Advisers (other than Allmerica Asset Management, Inc.) are not affiliated
with the Company or the Trust.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Policy: Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity
VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate VIP.
FMR is one of America's largest investment management organizations, and has its
principal business address at 82 Devonshire Street, Boston, Massachusetts. It is
composed of a number of different companies which provide a variety of financial
services and products. FMR is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services. The Portfolios of Fidelity VIP, as part of their
operating expenses, pay an investment monthly management fee to FMR for managing
investments and business affairs. The prospectus of Fidelity VIP contains
additional information concerning the Portfolios, including information
concerning additional expenses paid by the Portfolios, and should be read in
conjunction with this Prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by
Fidelity Management (see discussion under "Fidelity Variable Insurance Products
Fund" above), is an open-end, diversified, management investment company
organized as a Massachusetts business trust on March 21, 1988, and is registered
with the SEC under the 1940 Act. One of its investment portfolios is available
under the Policy: the Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation, and
is registered with the SEC under the 1940 Act. Price-Fleming, founded in 1979 as
a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Limited, is one of the largest no-load international mutual fund asset
managers, with approximately $42.5 billion (as of December 31, 1999) under
management in its offices in Baltimore, London, Tokyo, Hong Kong, Singapore and
Buenos Aires. One of its investment portfolios is available under the Policies:
the T. Rowe Price International Stock Portfolio. An affiliate of Price-Fleming,
T. Rowe Price Associates, Inc. serves as Sub-Adviser to the Select Capital
Appreciation Fund of the Trust.
DELAWARE GROUP PREMIUM FUND
Delaware Group Premium Fund ("DGPF") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of DGPF or its separate investment series. DGPF was established to provide a
vehicle for the investment of assets of various separate accounts supporting
variable insurance policies. One investment portfolio ("Series") is available
under the Policy: the International Equity Series. The Investment adviser for
the International Equity Series is Delaware International Advisers Ltd.
("Delaware International").
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INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND
IN THEIR RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE
READ CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration, and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund invests primarily in common stock of industries and
companies which are believed to be experiencing favorable demand for their
products and services, and which operate in a favorable competitive environment
and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
CORE EQUITY FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Core Equity Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
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EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money-market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
SELECT INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of
fixed income securities with the objective of seeking as high a level of total
return (including both income and capital appreciation) as is consistent with
prudent investment management.
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Policy Value in that Sub-Account, the
Company will transfer it without charge on Written Request within sixty
(60) days of the later of (1) the effective date of such change in the
investment policy, or (2) your receipt of the notice of the right to transfer.
You may then change the percentages of your premium and deduction allocations.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy interest in a Sub-Account without notice to
the Policyowner and prior approval of the SEC and state insurance authorities,
to the extent required by law. The Separate Account may, to the extent permitted
by law, purchase other securities for other policies or permit a conversion
between policies upon request by a Policyowner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares of a new Underlying Fund
or in shares of another investment company. Subject to applicable law and any
required SEC approval, the Company may, in its sole discretion, establish new
Sub-Accounts or eliminate one or more Sub-Accounts if marketing needs, tax
considerations or investment conditions warrant. Any new Sub-Accounts may be
made available to existing Policyowners on a basis to be determined by the
Company.
Shares of the Funds of the Trust also are issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price and the Series of DGPF also are issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policyowners or variable annuity contract owners. Although the
Company and the Underlying Investment Companies currently do not foresee any
such disadvantages to either variable life insurance policyowners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts and to determine what
action, if any, should be taken. If the Trustees were to conclude that separate
Funds should be established for variable life and variable annuity separate
accounts, the Company will bear the expenses.
If any of these substitutions or changes are made, the Company may endorse the
Policy to reflect the substitution or change, and will notify Policyowners of
all such changes. If the Company deems it to be in the best interest of
Policyowners, and subject to any approvals that may be required under applicable
law, the Separate Account or any Sub-Account(s) may be operated as a management
company under the 1940 Act, may be deregistered under the 1940 Act if
registration is no longer required, or may be combined with other Sub-Accounts
or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Policyowners
with Policy Value in such Sub-Account. If the 1940 Act or any rules thereunder
should be amended, or if the present interpretation of the 1940 Act or such
rules should change and, as a result the Company determines that it is permitted
to vote shares in its own right, whether or not such shares are attributable to
the Policy, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions which have been received by the Company. The Company also will vote
shares held in the Separate Account that it owns and which are not attributable
to the Policy in the same proportion.
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The number of votes which a Policyowner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Policyowner's Policy Value in
the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the sub-classification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Policyowners or the Trustees. The Company's disapproval of any such
change must be reasonable and, in the case of a change in investment policies or
investment adviser, based on a good faith determination that such change would
be contrary to state law or otherwise is inappropriate in light of the
objectives and purposes of the Underlying Funds. In the event the Company does
disregard voting instructions, a summary of and the reasons for that action will
be included in the next periodic report to Policyowners.
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THE POLICY
APPLYING FOR THE POLICY
The Policy cannot be issued until the underwriting procedure has been completed.
Upon receipt at the Principal Office of a completed application from a
prospective Policyowner, the Company will follow certain insurance underwriting
procedures designed to determine whether the proposed Insured is insurable. This
process may involve medical examinations, and may require that further
information be provided by the proposed Policyowner before a determination of
insurability can be made. The Company reserves the right to reject an
application which does not meet its underwriting guidelines, but in underwriting
insurance, the Company complies with all applicable federal and state
prohibitions concerning unfair discrimination.
CONDITIONAL INSURANCE AGREEMENT
It is possible to obtain life insurance protection during the underwriting
process through a Conditional Insurance Agreement. If at the time of application
you make a payment equal to at least one "Minimum Monthly Factor" for the Policy
as applied for, the Company will provide fixed conditional insurance in the
amount of insurance applied for, subject to the conditions set forth in the
Conditional Insurance Agreement. This coverage generally will continue for a
maximum of 90 days from the date of the application or the completion of a
medical exam, should one be required. In no event will any insurance proceeds be
paid under the Conditional Insurance Agreement if death is by suicide.
PREMIUMS HELD IN THE GENERAL ACCOUNT PENDING UNDERWRITING APPROVAL
Pending completion of insurance underwriting and Policy issuance procedures, the
initial premium will be held in the General Account. If the application is
approved and the Policy is issued and accepted by you, the initial premium held
in the General Account will be credited with interest at a specified rate,
beginning not later than the date of receipt of the premium at the Principal
Office. IF THE POLICY IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU
WITHOUT INTEREST.
FREE-LOOK PERIOD
The Policy provides for an initial "Free-Look" period. You may cancel the Policy
by mailing or delivering the Policy to the Principal Office or an agent of the
Company on or before the latest of:
- 45 days after the application for the Policy is signed, or
- 10 days after you receive the Policy (or longer if required by state law),
or
- 10 days after the Company mails or personally delivers a notice of
withdrawal rights to you,
- 60 days after you receive the Policy, if the Policy was purchased in New
York as a replacement for an existing policy.
When you return the Policy, the Company will mail a refund to you within seven
days. The refund of any premium paid by check may be delayed until the check has
cleared your bank.
Where required by state law, the refund will equal the premiums paid. In other
states the refund will equal the sum of:
(1) the difference between the premiums, including fees and charges paid,
and any amounts allocated to the Separate Account, PLUS
(2) the value of the amounts allocated to the Separate Account, PLUS
(3) any fees or charges imposed on the amounts allocated to the Separate
Account.
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The amount refunded in (1) above includes any premiums allocated to the General
Account.
FREE LOOK WITH FACE AMOUNT INCREASES
After an increase in the Face Amount, the Company will mail or personally
deliver a notice of a "Free Look" with respect to the increase. You will have
the right to cancel the increase before the latest of:
- 45 days after the application for the increase is signed, or
- 10 days after you receive the new specification pages issued for the
increase (or longer if required by state law), or
- 10 days after the Company mails or delivers a notice of withdrawal rights
to you.
Upon canceling the increase, you will receive a credit to the Policy Value of
charges which would not have been deducted but for the increase. The amount to
be credited will be refunded if you so request. The Company also will waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in the Face Amount (assuming the Policy is in force), you
may convert your Policy without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Policy Value in the Separate Account to the General Account
and by simultaneously changing your premium allocation instructions to allocate
future premium payments to the General Account. Within 24 months after the
effective date of each increase, you can transfer, without charge, all or part
of the Policy Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, at your request, the Company will issue a flexible
premium adjustable life insurance policy to you. The new policy will have the
same Face Amount, Issue Age, Dates of Issue, and Premium Class as the original
Policy.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through one of the Company's authorized agents. All premium
payments after the initial premium payment are credited to the Separate Account
or the General Account as of date of receipt at the Principal Office.
PREMIUM FLEXIBILITY
Unlike conventional insurance policies, the Policy does not obligate you to pay
premiums in accordance with a rigid and inflexible premium schedule. You may
establish a schedule of planned premiums which will be billed by the Company at
regular intervals. Failure to pay planned premiums, however, will not itself
cause the Policy to lapse. However, if the optional Guaranteed Death Benefit
Rider is in effect, certain minimum premium payment tests must be met. This
Rider may not be available in all states.
You also may make unscheduled premium payments at any time prior to the Final
Premium Payment Date, or skip planned premium payments, subject to the maximum
and minimum premium limitations described below.
You also may elect to pay premiums by means of a monthly automatic payment
procedure. Under this procedure, amounts will be deducted each month from your
checking account, generally on the Monthly
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Payment Date, and applied as a premium under a Policy. The minimum payment
permitted under this procedure is $50.
Premiums are not limited as to frequency and number. No premium payment may be
less than $100, however, without the Company's consent. Moreover, premium
payments must be sufficient to provide a positive Surrender Value at the end of
each Policy month, or the Policy may lapse. See POLICY TERMINATION AND
REINSTATEMENT.
MINIMUM MONTHLY FACTOR
The Minimum Monthly Factor is a monthly premium amount calculated by the Company
and specified in the Policy. If, in the first 48 Policy months following Date of
Issue or the effective date of an increase in the Face Amount or of a Policy
Change which causes a change in the Minimum Monthly Factor:
- You make premium payments (less debt, partial withdrawals and partial
withdrawal charges) at least equal to the sum of the Minimum Monthly
Factors for the number of months the Policy, increase in Face Amount or
Policy Change has been in force, and
- Debt does not exceed Policy Value less surrender charges, then
- the Policy is guaranteed not to lapse during that period.
EXCEPT FOR THE 48 POLICY MONTH PERIODS, MAKING MONTHLY PAYMENTS AT LEAST EQUAL
TO THE MINIMUM MONTHLY FACTOR DOES NOT GUARANTEE THAT THE POLICY WILL REMAIN IN
FORCE.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Policy which are required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the Sum
Insured Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will accept only
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned, and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by IRS rules. Notwithstanding the current maximum premium
limitations, however, the Company will accept a premium which is needed in order
to prevent a lapse of the Policy during a Policy year. See POLICY TERMINATION
AND REINSTATEMENT.
INCENTIVE FUNDING DISCOUNT
The Company will lower the cost of insurance charges by 5% during any Policy
year for which you qualify for an incentive funding discount. To qualify, total
premiums paid under the Policy, less any Debt, withdrawals and withdrawal
charges, and transfers from other policies issued by the Company, must exceed
90% of the guideline level premiums (as defined in Section 7702 of the Code)
accumulated from the Date of Issue to the date of qualification. The incentive
funding discount may not be available in all states.
The amount needed to qualify for the incentive funding discount is determined on
the Date of Issue for the first Policy year and on each Policy anniversary for
each subsequent Policy year. If the Company receives the proceeds from a policy
issued by an unaffiliated company to be exchanged for the Policy, however, the
qualification for the incentive funding discount for the first Policy year will
be determined on the date the proceeds are received by the Company, and only
insurance charges becoming due after the date such proceeds are received will be
eligible for the incentive funding discount.
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GUARANTEED DEATH BENEFIT RIDER (MAY NOT BE AVAILABLE IN ALL STATES)
An optional Guaranteed Death Benefit Rider is available only at Date of Issue of
the Policy. If this Rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Separate Account and
- provides a guaranteed net death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in the Face Amount,
as described below. In addition, a one-time administrative charge of $25 will be
deducted from the Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. IF THIS RIDER IS TERMINATED, IT
CANNOT BE REINSTATED.
GUARANTEED DEATH BENEFIT TESTS
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
1. Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any Debt,
partial withdrawals and withdrawal charges, must be greater than the Minimum
Monthly Factor (if any) multiplied by the number of months which have
elapsed since the relevant Date of Issue; and
2. On each Policy anniversary, (a) must exceed (b), where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Debt which is classified as a preferred loan; and
(b) is the sum of the minimum Guaranteed Death Benefit premiums, as shown on
the specifications page of the Policy.
GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, guaranteed Death Proceeds will be provided as long as the Rider is in
force. The Death Proceeds will be the greater of:
- the Face Amount as of the Final Premium Payment Date; or
- the Policy Value as of the date due proof of death is received by the
Company.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of a Policy Loan; or
- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above); or
- any Policy change that results in a negative guideline level premium; or
- the effective date of a change from Sum Insured Option 2 to Sum Insured
Option I, if such changes occurs within five Policy years of the Final
Premium Payment Date; or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
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It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates. The net amount payable to keep the Policy in force will never exceed
the surrender charge plus three Monthly Deductions.
PAID-UP INSURANCE OPTION
Upon written request, a Policyowner may exercise a paid-up insurance option.
Paid-up life insurance is fixed insurance, usually having a reduced Face Amount,
for the lifetime of the insured with no further premiums due. If the Policyowner
elects this option, certain Policyowner rights and benefits may be limited.
The paid-up fixed insurance will be in the amount that the Surrender Value of
the Policy can purchase for a net single premium at the Insured's Age and
Underwriting Class on the date this option is elected. The Company will transfer
any Policy Value in the Separate Account to the General Account on the date it
receives the Written Request to elect the option. If the Surrender Value exceeds
the net single premium necessary for the fixed insurance, the Company will pay
the excess to the Policyowner. The net single premium is based on the
Commissioners 1980 Standard Ordinary Mortality Tables, Smoker or Non- Smoker
(Table B for unisex Policies) with increases in the tables for non- standard
risks. Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICYOWNER RIGHTS AND
BENEFITS WILL BE AFFECTED:
- As described above, the paid-up insurance benefit is computed differently
from the net death benefit, and the death benefit options will not apply.
- The Company will transfer the Policy Value in the Separate Account to the
General Account on the date it receives the Written Request electing the
option. The Company will not allow transfers of Policy Value from the
General Account back to the Separate Account.
- The Policyowner may not make further premium payments.
- The Policyowner may not increase or decrease the Face Amount or make
partial withdrawals.
- Riders will continue only with the Company's consent.
After electing paid-up fixed insurance, the Policyowner may make Policy loans or
surrender the Policy for its net cash value. The cash value is equal to the net
single premium for paid-up insurance at the Insured's attained Age. The net cash
value is the cash value less any Debt.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less the 2 1/4% tax expense charge. In
the application for the Policy, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts. You may allocate
premiums to one or more Sub-Accounts, but may not have Policy Value in more than
20 Sub-Accounts at any one time. The minimum amount which may be allocated to a
Sub-Account is 1% of Net Premium paid. Allocation percentages must be in whole
numbers (for example, 33 1/3% may not be chosen) and must total 100%.
FUTURE CHANGES ALLOWED
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. Currently, no charge is
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
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If allocation changes by telephone are elected by the Policyowner, a properly
completed authorization form must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All transfer instructions by telephone are tape recorded.
INVESTMENT RISK
The Policy Value in the Sub-Accounts will vary with their investment experience;
you bear this investment risk. The investment performance may affect the Death
Proceeds as well. Policyowners periodically should review their allocations of
premiums and Policy Value in light of market conditions and overall financial
planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Policy Value among the Sub-Accounts or between a Sub-Account and the General
Account. However, the Policy Value held in the General Account to secure a
Policy loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Policy Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone request. As discussed in THE POLICY -- "Allocation of Net
Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Currently, transfers to and from the General Account are permitted only if:
- there has been at least a 90-day period since the last transfer from the
General Account, and
- the amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000, or 25% of the Accumulated Value under the
Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust, respectively, to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, bi-monthly, quarterly, semi-annual
or annual schedule. Generally, all transfers will be processed on the 15th of
each scheduled month. If the 15th is not a business day, however, or is the
Monthly Payment Date, the automatic transfer will be processed on the next
business day. The Dollar-Cost Averaging Option and the Automatic Rebalancing
Option may not be in effect at the same time.
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TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITS
The transfer privilege is subject to the Company's consent. The Company reserves
the right to impose limitations on transfers including, but not limited to:
- the minimum amount that may be transferred,
- the minimum amount that may remain in a Sub-Account following a transfer
from that Sub-Account,
- the minimum period of time between transfers involving the General
Account, and
- the maximum amount that may be transferred each time from the General
Account.
Currently, the first 12 transfers in a Policy year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Policy year. The Company may increase or decrease this
charge, but it is guaranteed never to exceed $25. The first automatic transfer
counts as one transfer towards the 12 free transfers allowed in each Policy
year; each subsequent automatic transfer is without charge and does not reduce
the remaining number of transfers which may be made free of charge. Any
transfers made with respect to a conversion privilege, Policy loan or material
change in investment policy will not count towards the 12 free transfers.
DEATH PROCEEDS
As long as the Policy remains in force (see POLICY TERMINATION AND
REINSTATEMENT), upon due proof of the Insured's death, the Company will pay the
Death Proceeds of the Policy to the named Beneficiary. The Company normally will
pay the Death Proceeds within seven days of receiving due proof of the Insured's
death, but the Company may delay payments under certain circumstances. See OTHER
POLICY PROVISIONS -- "Postponement of Payments." The Death Proceeds may be
received by the Beneficiary in cash or under one or more of the payment options
set forth in the Policy. See APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS.
Prior to the Final Premium Payment Date, the Death Proceeds are equal to:
- the Sum Insured provided under Option 1 or Option 2, whichever is elected
and in effect on the date of death; PLUS
- any additional insurance on the Insured's life that is provided by rider;
MINUS
- any outstanding Debt, any partial withdrawals and partial withdrawal
charges, and any Monthly Deductions due and unpaid through the Policy
month in which the Insured dies.
After the Final Premium Payment Date, the Death Proceeds equal the Surrender
Value unless the Guaranteed Death Benefit Rider is in effect. If the Guaranteed
Death Benefit Rider is in effect, the Death Proceeds equal the greater of the
Face Amount or Surrender Value. The amount of Death Proceeds payable will be
determined as of the date the Company receives due proof of the Insured's death
for Option 2 and on the date of the Insured's death for Option 1.
SUM INSURED OPTIONS
The Policy provides two Sum Insured Options: Option 1 and Option 2, as described
below. You designate the desired Sum Insured Option in the application. You may
change the Option once per Policy year by Written Request. There is no charge
for a change in Option.
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Under Option 1, the Sum Insured is equal to the greater of the Face Amount of
insurance or the Guideline Minimum Sum Insured. Under Option 2, the Sum Insured
is equal to the greater of the Face Amount of insurance plus the Policy Value or
the Guideline Minimum Sum Insured.
GUIDELINE MINIMUM SUM INSURED
To remain qualified as "life insurance" for federal tax purposes, federal tax
law requires that policies have a minimum amount of pure life insurance
protection in relation to the size of the Policy Value. The Guideline Minimum
Sum Insured is used to determine compliance with this requirement. So long as
the Policy qualifies as a life insurance contract, the insurance proceeds will
be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM SUM INSURED TABLE
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ---------------- -------------
<S> <C>
40 and under.......................................... 250%
45.................................................... 215%
50.................................................... 185%
55.................................................... 150%
60.................................................... 130%
65.................................................... 120%
70.................................................... 115%
75.................................................... 105%
80.................................................... 105%
85.................................................... 105%
90.................................................... 105%
95 and above.......................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
Under both Option 1 and Option 2, the Sum Insured provides insurance protection.
Under Option 1, the Sum Insured remains level unless the applicable percentage
of Policy Value under the Guideline Minimum Sum Insured exceeds the Face Amount,
in which case the Sum Insured will vary as the Policy Value varies. Under Option
2, the Sum Insured varies as the Policy Value changes.
For any Face Amount, the amount of the Sum Insured (and the Death Proceeds) will
be greater under Option 2 than under Option 1. This is because the Policy Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. Under Option 2, however, the cost of insurance included in the
Monthly Deduction will be greater, and the rate at which Policy Value will
accumulate will be slower (assuming the same specified Face Amount and the same
actual premiums paid). See CHARGES AND DEDUCTIONS -- "Monthly Deductions from
the Policy Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Sum Insured, you should choose Option 2. If you desire premium
payments and investment performance reflected to the maximum extent in the
Policy Value, you should select Option 1.
ILLUSTRATIONS
For the purposes of the following illustrations, assume that the Insured is
under the Age of 40 and that there is no outstanding Debt.
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ILLUSTRATION OF OPTION 1
Under Option 1, the Face Amount generally will equal the Sum Insured. If at any
time, however, the Policy Value multiplied by the applicable percentage is less
than the Face Amount, the Sum Insured will equal the Face Amount of the Policy.
For example, a Policy with a $50,000 Face Amount will generally have a Sum
Insured equal to $50,000. Because the Sum Insured must be equal to or greater
than 250% of Policy Value, however, if at any time the Policy Value exceeds
$20,000, the Sum Insured will exceed the $50,000 Face Amount. In this example,
each additional dollar of Policy Value above $20,000 will increase the Sum
Insured by $2.50. For example, a Policy with a Policy Value of $35,000 will have
a Guideline Minimum Sum Insured of $87,500 ($35,000 X 2.50); Policy Value of
$40,000 will produce a Guideline Minimum Sum Insured of $100,000 ($40,000 X
2.50); and Policy Value of $50,000 will produce a Guideline Minimum Sum Insured
of $125,000 ($50,000 X 2.50).
Similarly, so long as the Policy Value exceeds $20,000, each dollar taken out of
the Policy Value will reduce the Sum Insured by $2.50. If, for example, the
Policy Value is reduced from $25,000 to $20,000 (because of partial withdrawals,
charges or negative investment performance), the Sum Insured will be reduced
from $62,500 to $50,000.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Sum Insured would not
exceed the $50,000 Face Amount unless the Policy Value exceeded $27,027 (rather
than $20,000), and each dollar then added to or taken from Policy Value would
change the Sum Insured by $1.85.
ILLUSTRATION OF OPTION 2
Under Option 2, the Sum Insured is generally equal to the Face Amount PLUS the
Policy Value. The Sum Insured under Option 2, however, always will be the
greater of:
- the Face Amount plus Policy Value; or
- the Policy Value multiplied by the applicable percentage from the
Guideline Minimum Sum Insured table.
For example, a Policy with a Face Amount of $50,000 and with Policy Value of
$5,000 will produce a Sum Insured of $55,000 ($50,000 + $5,000). A Policy Value
of $10,000 will produce a Sum Insured of $60,000 ($50,000 + $10,000); a Policy
Value of $25,000 will produce a Sum Insured of $75,000 ($50,000 + $25,000).
According to the Guideline Minimum Sum Insured table, however, the Sum Insured
for the example must be at least 250% of the Policy Value. Therefore, if the
Policy Value is greater than $33,333, 250% of that amount will be the required
Sum Insured, which will be greater than the Face Amount plus the Policy Value.
In this example, each additional dollar of Policy Value above $33,333 will
increase the Sum Insured by $2.50. For example, if the Policy Value is $35,000,
the Guideline Minimum Sum Insured will be $87,500 ($35,000 X 2.50); a Policy
Value of $40,000 will produce a Guideline Minimum Sum Insured of $100,000
($40,000 X 2.50); and a Policy Value of $50,000 will produce a Guideline Minimum
Sum Insured of $125,000 ($50,000 X 2.50).
Similarly, if the Policy Value exceeds $33,333, each dollar taken out of the
Policy Value will reduce the Sum Insured by $2.50. If, for example, the Policy
Value is reduced from $45,000 to $40,000 because of partial withdrawals, charges
or negative investment performance, the Sum Insured will be reduced from
$112,500 to $100,000. If at any time, however, the Policy Value multiplied by
the applicable percentage is less than the Face Amount plus the Policy Value,
then the Sum Insured will be the current Face Amount plus the Policy Value.
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<PAGE>
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Sum Insured must be at least
1.85 times the Policy Value. The amount of the Sum Insured would be the sum of
the Policy Value plus $50,000 unless the Policy Value exceeded $58,824 (rather
than $33,000). Each dollar added to or subtracted from the Policy Value would
change the Sum Insured by $1.85.
CHANGE IN SUM INSURED OPTION
Generally, the Sum Insured Option in effect may be changed once each Policy year
by sending a Written Request for change to the Principal Office. Changing Sum
Insured Options will not require Evidence of Insurability. The effective date of
any such change will be the Monthly Payment Date on or following the date of
receipt of the request. No charges will be imposed on changes in Sum Insured
Options.
CHANGE FROM OPTION 1 TO OPTION 2
If the Sum Insured Option is changed from Option 1 to Option 2, the Face Amount
will be decreased to equal the Sum Insured less the Policy Value on the
effective date of the change. This change may not be made if it would result in
a Face Amount of less than $40,000. A change from Option 1 to Option 2 will not
alter the amount of the Sum Insured at the time of the change, but will affect
the determination of the Sum Insured from that point on. Because the Policy
Value will be added to the new specified Face Amount, the Sum Insured will vary
with the Policy Value. Under Option 2, the Insurance Amount at Risk always will
equal the Face Amount unless the Guideline Minimum Sum Insured is in effect. The
cost of insurance also may be higher or lower than it otherwise would have been
without the change in Sum Insured Option. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value."
CHANGE FROM OPTION 2 TO OPTION 1
If the Sum Insured Option is changed from Option 2 to Option 1, the Face Amount
will be increased to equal the Sum Insured which would have been payable under
Option 2 on the effective date of the change (i.e., the Face Amount immediately
prior to the change plus the Policy Value on the date of the change). The amount
of the Sum Insured will not be altered at the time of the change. The change in
option, however, will affect the determination of the Sum Insured from that
point on, since the Policy Value no longer will be added to the Face Amount in
determining the Sum Insured; the Sum Insured will equal the new Face Amount (or,
if higher, the Guideline Minimum Sum Insured). The cost of insurance may be
higher or lower than it otherwise would have been since any increases or
decreases in the Policy Value will reduce or increase, respectively, the
Insurance Amount at Risk under Option 1. Assuming a positive net investment
return with respect to any amounts in the Separate Account, changing the Sum
Insured Option from Option 2 to Option 1 will reduce the Insurance Amount at
Risk and therefore the cost of insurance charge for all subsequent Monthly
Deductions, compared to what such charge would have been if no such change were
made.
A change in Sum Insured Option may result in total premiums paid exceeding the
then-current maximum premium limitation determined by Internal Revenue Service
("IRS") rules. In such event, the Company will pay the excess to the
Policyowner. See THE POLICY -- "Premium Payments."
CHANGE IN THE FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount at any time by submitting a Written Request to the Company. Any increase
or decrease in the specified Face Amount requested by you will become effective
on the Monthly Payment Date on or next following the date of receipt of the
request at the Principal Office or, if Evidence of Insurability is required, the
date of approval of the request.
INCREASES IN THE FACE AMOUNT
Along with the Written Request for an increase, you must submit Evidence of
Insurability. The consent of the Insured also is required whenever the Face
Amount is increased. A request for an increase in the Face Amount
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<PAGE>
may not be less than $10,000. You may not increase the Face Amount after the
Insured reaches Age 85. An increase must be accompanied by an additional premium
if the Surrender Value is less than $50 plus an amount equal to the sum of two
Minimum Monthly Factors.
On the effective date of each increase in the Face Amount, a transaction charge
of $40 will be deducted from the Policy Value for administrative costs. The
effective date of the increase will be the first Monthly Payment Date on or
following the date all of the conditions for the increase are met.
An increase in the Face Amount generally will affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Premium Classes (if more than one Premium Class applies), both of which
may affect the monthly cost of insurance charges. A surrender charge also will
be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from the Policy Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled, and the charges which would not have
been deducted but for the increase will be credited to the Policy, and
(2) during the first 24 months following the increase, to transfer any or all
Policy Value to the General Account free of charge. See THE POLICY -- "Free-Look
Period" and "Conversion Privileges." A refund of charges which would not have
been deducted but for the increase will be made at your request.
DECREASES IN THE FACE AMOUNT
The minimum amount for a decrease in the Face Amount is $10,000. The Face Amount
in force after any decrease may not be less than $50,000. If, following a
decrease in the Face Amount, the Policy would not comply with the maximum
premium limitation applicable under IRS rules, the decrease may be limited or
the Policy Value may be returned to the Policyowner (at your election) to the
extent necessary to meet the requirements. A return of Policy Value may result
in a tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Premium Classes,
both of which may affect a Policyowner's monthly cost of insurance charges. See
CHARGES AND DEDUCTIONS -- "Monthly Deductions from the Policy Value." For
purposes of determining the cost of insurance charge, any decrease in the Face
Amount will reduce the Face Amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount.
This order also will be used to determine whether a surrender charge will be
deducted and in what amount. If you request a decrease in the Face Amount, the
amount of any surrender charge deducted will reduce the current Policy Value.
You may specify one Sub-Account from which the surrender charge will be
deducted. If no specification is provided, the Company will make a Pro-Rata
Allocation. The current surrender charge will be reduced by the amount deducted.
For more information, see CHARGES AND DEDUCTIONS -- "Surrender Charge" or
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGE.
POLICY VALUE AND SURRENDER VALUE
The Policy Value is the total amount available for investment, and is equal to
the sum of:
- your accumulation in the General Account, PLUS
- the value of the Accumulation Units in the Sub-Accounts.
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<PAGE>
The Policy Value is used in determining the Surrender Value. See THE POLICY --
"Policy Surrender." There is no guaranteed minimum Policy Value. Because the
Policy Value on any date depends upon a number of variables, it cannot be
predetermined.
The Policy Value and the Surrender Value will reflect frequency and amount of
Net Premiums paid, interest credited to accumulations in the General Account,
the investment performance of the chosen Sub-Accounts, any partial withdrawals,
any loans, any loan repayments, any loan interest paid or credited, and any
charges assessed in connection with the Policy.
CALCULATION OF POLICY VALUE
The Policy Value is determined first on the Date of Issue and thereafter on each
Valuation Date. On the Date of Issue, the Policy Value will be the Net Premiums
received, plus any interest earned during the underwriting period when premiums
are held in the General Account (before being transferred to the Separate
Account; see THE POLICY -- "Applying for the Policy") less any Monthly
Deductions due. On each Valuation Date after the Date of Issue the Policy Value
will be:
- the aggregate of the values in each of the Sub-Accounts on the Valuation
Date, determined for each Sub-Account by multiplying the value of an
Accumulation Unit in that Sub-Account on that date by the number of such
Accumulations Units allocated to the Policy; PLUS
- the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Policy Value is determined by multiplying the number of Accumulation
Units in each Sub-Account by the value of the applicable Accumulation Units on
the particular Valuation Date, adding the products, and adding the amount of the
accumulations in the General Account, if any.
THE ACCUMULATION UNIT
Each Net Premium is allocated to the Sub-Accounts selected by you. Allocations
to the Sub-Accounts are credited to the Policy in the form of Accumulation
Units. Accumulation Units are credited separately for each Sub-Account.
The number of Accumulation Units of each Sub-Account credited to the Policy is
equal to the portion of the Net Premium allocated to the Sub-Account, divided by
the dollar value of the applicable Accumulation Unit as of the Valuation Date
the payment is received at the Principal Office. The number of Accumulation
Units will remain fixed unless changed by a subsequent split of Accumulation
Unit value, transfer, partial withdrawal or Policy surrender. In addition, if
the Company is deducting the Monthly Deduction or other charges from a
Sub-Account, each such deduction will result in cancellation of a number of
Accumulation Units equal in value to the amount deducted.
The dollar value of an Accumulation Unit of each Sub-Account varies from
Valuation Date to Valuation Date based on the investment experience of that
Sub-Account. That experience, in turn, will reflect the investment performance,
expenses and charges of the respective Underlying Fund. The value of an
Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account. The dollar value of an Accumulation Unit on a given Valuation Date
is determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
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NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b) and subtracting (c) and (d) from the result,
where:
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(c) is a charge for each day in the Valuation Period equal, on an annual basis,
to 0.65% of the daily net asset value of that Sub-Account for mortality and
expense risks. This charge may be increased or decreased by the Company, but
may not exceed 0.90%; and
(d) is the Separate Account administrative charge for each day in the Valuation
Period equal, on an annual basis, to 0.15% of the daily net asset value of
the Sub-Account. The administrative charge may be increased or decreased by
the Company, but may not exceed 0.25%. This charge is applicable only during
the first ten Policy years.
The net investment factor may be greater or less than one. Therefore, the value
of an Accumulation Unit may increase or decrease. You bear the investment risk.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
DEATH PROCEEDS PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the available payment options. The
payment options currently available are described in APPENDIX B -- DEATH
PROCEEDS PAYMENT OPTIONS. These choices also are available at the Final Premium
Payment Date and if the Policy is surrendered. The Company may make more payment
options available in the future.
If no election is made, the Company will pay the Death Proceeds in a single sum.
When the Death Proceeds are payable in a single sum, the Beneficiary may, within
one year of the Insured's death, select one or more of the payment options if no
payments have yet been made.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to the Policy by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deductions from
the Policy Value."
POLICY SURRENDER
You may surrender the Policy at any time and receive its Surrender Value. The
Surrender Value is equal to:
- the Policy Value, MINUS
- any Debt and applicable surrender charges.
The Surrender Value will be calculated as of the Valuation Date on which a
Written Request for surrender is received at the Principal Office. A surrender
charge is calculated upon issuance of the Policy and from the
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effective date of any increase in the Face Amount. The duration of the surrender
charge is 15 years for issue Ages 0 through 50, grading down to 10 years for
issue Ages 55 and above. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options described in APPENDIX B -- DEATH PROCEEDS PAYMENT OPTIONS. Normally, the
Company will pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER POLICY PROVISIONS -- "Postponement of
Payments."
The surrender rights of Policyowners who are participants under Section 403(b)
plans, or who are participants in the Texas Optional Retirement Program ("Texas
ORP") are restricted; see FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN
CONNECTION WITH TSA PLANS."
For important tax consequences which may result from surrender, see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWALS
Any time after the first Policy year, you may withdraw a portion of the
Surrender Value, subject to the limits stated below, upon Written Request filed
at the Principal Office. The Written Request must indicate the dollar amount you
wish to receive and the Accounts from which such amount is to be withdrawn. You
may allocate the amount withdrawn among the Sub-Accounts and the General
Account. If you do not provide allocation instructions, the Company will make a
Pro-Rata Allocation. Each partial withdrawal must be in a minimum amount of
$500.
Under Option 1, the Face Amount is reduced by the amount of the withdrawal, and
a withdrawal will not be allowed if it would reduce the Face Amount below
$40,000.
A withdrawal from a Sub-Account will result in the cancellation of the number of
Accumulation Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal." Normally, the Company will pay
the amount of the partial withdrawal within seven days following the Company's
receipt of the partial withdrawal request, but the Company may delay payment
under certain circumstances described in OTHER POLICY PROVISIONS --
"Postponement of Payments."
The withdrawal rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS." For important
tax consequences which may result from partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
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CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the Company
for providing the insurance benefits set forth in the Policy and any additional
benefits added by rider, administering the Policy, incurring distribution
expenses, and assuming certain risks in connection with the Policy. Each of the
charges identified as an administrative charge is intended to reimburse the
Company for actual administrative costs incurred, and is not intended to result
in a profit to the Company.
TAX EXPENSE CHARGE
Currently, a deduction of 2 1/4% of premiums for state and local premium taxes
and federal taxes imposed for deferred acquisition cost ("DAC") taxes is made
from each premium payment. The premium payment, less the tax expense charge,
equals the Net Premium. The total charge is a combined state and local premium
tax deduction of 1 1/4% of premiums and a DAC tax deduction of 1% of premiums.
While the premium tax of 1 1/4% is deducted from each premium payment, some
jurisdictions may not impose premium taxes. Premium taxes vary from state to
state, ranging from zero to 4.0%, and the 1 1/4% rate attributable to premiums
for state and local premium taxes approximates the average expenses to the
Company associated with the premium taxes. The 1 1/4% charge may be higher or
lower than the actual premium tax imposed by the applicable jurisdiction. The
Company, however, does not expect to make a profit from this charge.
The 1% rate attributable to premiums for DAC taxes approximates the Company's
expenses in paying federal taxes for deferred acquisition costs associated with
the Policy. The Company reserves the right to increase or decrease the DAC tax
charge to reflect changes in the Company's expenses for premium taxes and DAC
taxes.
MONTHLY DEDUCTION FROM THE POLICY VALUE
Prior to the Final Premium Payment Date, a Monthly Deduction from the Policy
Value will be made to cover a charge for the cost of insurance, a charge for any
optional insurance benefits added by rider, and a monthly administrative charge.
The cost of insurance charge and the monthly administrative charge is discussed
below. The Monthly Deduction on or following the effective date of a requested
increase in the Face Amount also will include a $40 administrative charge for
the increase. See THE POLICY -- "Change in the Face Amount."
Prior to the Final Premium Payment Date, the Monthly Deduction will be deducted
as of each Monthly Payment Date commencing with the Date of Issue of the Policy.
It will be allocated to one Sub-Account according to your instructions or, if no
allocation is specified, the Company will make a Pro-Rata Allocation. If the
Sub-Account you specify does not have sufficient funds to cover the Monthly
Deduction, the Company will deduct the charge for that month as if no
specification were made. If, however, on subsequent Monthly Payment Dates there
is sufficient Policy Value in the Sub-Account you specified, the Monthly
Deduction will be deducted from that Sub-Account. No Monthly Deductions will be
made on or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount, and for riders. Because the cost of
insurance depends upon a number of variables, it can vary from month to month.
CALCULATION OF THE CHARGE
If you select Sum Insured Option 2, the monthly cost of insurance charge for the
initial Face Amount generally will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If you select Sum
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Insured Option 1, however, the applicable cost of insurance rate will be
multiplied by the initial Face Amount less the Policy Value (minus charges for
rider benefits) at the beginning of the Policy month. Thus, the cost of
insurance charge may be greater for Policyowners who have selected Sum Insured
Option 2 than for those who have selected Sum Insured Option 1 (assuming the
same Face Amount in each case and assuming that the Guideline Minimum Sum
Insured is not in effect). In other words, since the Sum Insured under Option 1
remains constant while the Sum Insured under Option 2 varies with the Policy
Value, any Policy Value increases will reduce the insurance charge under Option
1 but not under Option 2.
If you select Sum Insured Option 2, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Sum
Insured Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If you select Sum
Insured Option 1, the applicable cost of insurance rate will be multiplied by
the increase in the Face Amount reduced by any Policy Value (minus rider
charges) in excess of the initial Face Amount at the beginning of the Policy
month.
EFFECT OF THE GUIDELINE MINIMUM SUM INSURED
If the Guideline Minimum Sum Insured is in effect under either Option, a monthly
cost of insurance charge also will be calculated for that additional portion of
the Sum Insured which is required to comply with the Guideline rules. This
charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Sum Insured (Policy Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Policy Value (if you selected Sum
Insured Option 1)
OR
- the Face Amount PLUS the Policy Value (if you selected Sum Insured
Option 2).
When the Guideline Minimum Sum Insured is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth above. The monthly cost of insurance charge also will be adjusted for
any decreases in the Face Amount. See THE POLICY -- "Change in the Face Amount"
and "Decreases."
COST OF INSURANCE RATES
Cost of insurance rates are based on male, female or a blended unisex rate
table, Age and Premium Class of the Insured, the effective date of an increase
or date of rider, as applicable, the amount of premiums paid less Debt, any
partial withdrawals and withdrawal charges, and risk classification and the
Incentive Funding Discount, if applicable. For those Policies issued on a unisex
basis in certain states or in certain cases, sex-distinct rates do not apply.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in the
Face Amount or rider are determined annually on the anniversary of the effective
date of each increase or rider. The cost of insurance rates generally increase
as the Insured's Age increases. The actual monthly cost of insurance rates will
be based on the Company's expectations as to future mortality experience. They
will not, however, be greater than the guaranteed cost of insurance rates set
forth in the Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables Smoker or Non-Smoker (Mortality Table B for
unisex Policies) and the Insured's sex and Age. The Tables used for this purpose
set forth different mortality estimates for males and females and for smokers
and non-smokers. Any change in the cost of insurance rates will apply to all
persons of the same insuring Age, sex and Premium Class whose Policies have been
in force for the same length of time.
The Premium Class of an Insured will affect the cost of insurance rates. The
Company currently places Insureds into preferred Premium Classes, standard
Premium Classes and substandard Premium Classes. In an otherwise identical
Policy, an Insured in the preferred Premium Class will have a lower cost of
insurance than
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an Insured in a standard Premium Class who, in turn, will have a lower cost of
insurance than an Insured in a substandard Premium Class with a higher mortality
risk.
Premium Classes also are divided into two categories: smokers and non-smokers.
Non-smoking Insureds will incur lower cost of insurance rates than Insureds who
are classified as smokers but who are otherwise in the same Premium Class. Any
Insured with an Age at issuance under 18 will be classified initially as regular
or substandard. The Insured then will be classified as a smoker at Age 18 unless
the Insured provides satisfactory evidence that the Insured is a non- smoker.
The Company will provide notice to you of the opportunity for the Insured to be
classified as a non-smoker when the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Premium Class than previously, a correspondingly higher cost of insurance rate
will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Premium Class previously applicable. On the other hand, if the Insured's
Premium Class improves on an increase, the lower cost of insurance rate
generally will apply to the entire Insurance Amount at Risk.
MONTHLY ADMINISTRATIVE CHARGES
Prior to the Final Premium Payment Date, a monthly administrative charge of $5
per month will be deducted from the Policy Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Policy, and will compensate the Company for first-year underwriting and other
start-up expenses incurred in connection with the Policy. These expenses include
the cost of processing applications, conducting medical examinations,
determining insurability and the Insured's Premium Class, and establishing
Policy records. The Company does not expect to derive a profit from these
charges.
CHARGES AGAINST ASSETS OF THE SEPARATE ACCOUNT
The Company assesses each Sub-Account with a charge for mortality and expense
risks assumed by the Company, and a charge for administrative expenses of the
Separate Account.
MORTALITY AND EXPENSE RISK CHARGE
The Company currently makes a charge on an annual basis of 0.65% of the daily
net asset value in each Sub-Account. This charge is for the mortality risk and
expense risk which the Company assumes in relation to the variable portion of
the Policy. The total charges may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but it may not exceed 0.90% on an annual basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company therefore will pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the Policy
will exceed the amounts realized from the administrative charges provided in the
Policy. If the charge for mortality and expense risks is not sufficient to cover
actual mortality experience and expenses, the Company will absorb the losses. If
costs are less than the amounts provided, the difference will be a profit to the
Company. To the extent this charge results in a current profit to the Company,
such profit will be available for use by the Company for, among other things,
the payment of distribution, sales and other expenses. Since mortality and
expense risks involve future contingencies which are not subject to precise
determination in advance, it is not feasible to identify specifically the
portion of the charge which is applicable to each.
SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
During the first ten Policy years, the Company assesses a charge on an annual
basis of 0.15% of the daily net asset value in each Sub-Account. The charge is
assessed to help defray administrative expenses actually incurred in the
administration of the Separate Account and the Sub-Accounts. The administrative
functions and expenses assumed by the Company in connection with the Separate
Account and the Sub-Accounts include, but are not limited to, clerical,
accounting, actuarial and legal services, rent, postage, telephone, office
equipment and supplies, expenses of preparing and printing registration
statements, expenses of
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preparing and typesetting prospectuses, and the cost of printing prospectuses
not allocable to sales expense, filing and other fees. No Separate Account
administrative charge is imposed after the tenth Policy year. The charge may be
increased or decreased by the Board of Directors of the Company, subject to
compliance with applicable state and federal requirements, but it may not exceed
0.25% on an annual basis.
OTHER CHARGES AND EXPENSES
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Accumulation Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. The prospectuses and
statements of additional information of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price and DGPF contain additional information concerning such fees
and expenses.
Currently, no charges are made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Policy Value in the Sub-Accounts.
SURRENDER CHARGE
The Policy provides for a contingent surrender charge. A separate surrender
charge is calculated upon the issuance of the Policy and for each increase in
the Face Amount. A surrender charge may be deducted if you request a full
surrender of the Policy or a decrease in the Face Amount.
The surrender charge is comprised of a contingent deferred administrative charge
and a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Policy. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Policy, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
The duration of the surrender charge is 15 years from the Date of Issue or from
the effective date of any increase in the Face Amount for issue Ages 0 through
50, grading down to 10 years for issue Ages 55 and above. The maximum surrender
charge calculated upon issuance of the Policy is equal to the sum of (a) plus
(b) where:
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and
(b) is a deferred sales charge of 49% of premiums received, up to a maximum
number of Guideline Annual Premiums subject to the deferred sales charge
that varies by issue Age from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80 and above).
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per $1,000
initial face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge continues in a level amount for
40 Policy months, and reduces by 0.5% or more per month (depending on issue Age)
thereafter, as described in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES. This reduction in the maximum surrender charge will reduce the deferred
sales charge and the deferred administrative charge proportionately.
MAXIMUM SURRENDER CHARGE DURING FIRST TWO POLICY YEARS
If you surrender the Policy during the first two Policy years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the initial Face
Amount, as described above, but the deferred sales charge will not exceed 29% of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium, but less than the maximum
number of Guideline Annual Premiums subject to the deferred sales charge. See
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
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SEPARATE SURRENDER CHARGE FOR EACH FACE AMOUNT INCREASE
A separate surrender charge will apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is
equal to the sum of (a) plus (b), where (a) is equal to $8.50 per thousand
dollars of increase, and (b) is a deferred sales charge of 49% of premiums
associated with the increase, up to a maximum number of Guideline Annual
Premiums (for the increase) subject to the deferred sales charge that varies by
Age (at the time of increase) from 1.660714 (for Ages 0 through 55) to 0.948980
(for Age 80 and above).
In accordance with limitations under state insurance regulations, the amount of
the surrender charge will not exceed a specified amount per $1,000 of increase,
as indicated in APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES. As is
true for the initial Face Amount, (a) is a deferred administrative charge, and
(b) is a deferred sales charge. The maximum surrender charge for the increase
continues in a level amount for 40 Policy months, and reduces by 0.5% or more
per month (depending on Age) thereafter, as provided in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
REDUCED CHARGE DURING FIRST TWO YEARS FOLLOWING INCREASE
During the first two Policy years following an increase in the Face Amount
before making premium payments associated with the increase in the Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of the Face Amount
increase, as described above, but the deferred sales charge imposed will be less
than the maximum described above. Upon such a Surrender, the deferred sales
charge will not exceed 29% of premiums associated with the increase, up to one
Guideline Annual Premium (for the increase), plus 9% of premiums associated with
the increase in excess of one Guideline Annual Premium, but less than the
maximum number of Guideline Annual Premiums (for the increase) subject to the
deferred sales charge. See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES. The premiums associated with the increase are determined as described
below.
Additional premium payments may not be required to fund a requested increase in
the Face Amount. Therefore, a special rule, which is based on relative Guideline
Annual Premium payments, applies to allocate a portion of the existing Policy
Value to the increase, and to allocate subsequent premium payments between the
initial Policy and the increase. For example, suppose the Guideline Annual
Premium is equal to $1,500 before an increase, and is equal to $2,000 as a
result of the increase. The Policy Value on the effective date of the increase
would be allocated 75% ($1,500/$2,000) to the initial Face Amount and 25% to the
increase. All future premiums also would be allocated 75% to the initial Face
Amount and 25% to the increase. Thus, existing Policy Value associated with the
increase will equal the portion of the Policy Value allocated to the increase on
the effective date of the increase before any deductions are made. Premiums
associated with the increase will equal the portion of the premium payments
actually made on or after the effective date of the increase which are allocated
to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
POSSIBLE SURRENDER CHARGE ON A FACE AMOUNT DECREASE
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Policy. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face
Amount), the surrender charge will be applied in the following order:
- the most recent increase;
- the next most recent increases successively, and
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- the initial Face Amount. Where a decrease causes a partial reduction in an
increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
For more information, see APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER
CHARGES.
CHARGES ON PARTIAL WITHDRAWAL
Partial withdrawals of Surrender Value may be made after the first Policy year.
The minimum withdrawal is $500. Under Option 1, the Face Amount is reduced by
the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A transaction charge, which is the smaller of 2% of the amount withdrawn, or
$25, will be assessed on each partial withdrawal to reimburse the Company for
the cost of processing the withdrawal. The Company does not expect to make a
profit on this charge. The transaction fee applies to all partial withdrawals
including a Withdrawal without a surrender charge.
A partial withdrawal charge also may be deducted from the Policy Value. For each
partial withdrawal you may withdraw an amount equal to 10% of the Policy Value
on the date the written withdrawal request is received by the Company less the
total of any prior withdrawals in that Policy year which were not subject to the
Partial Withdrawal charge, without incurring a partial withdrawal charge. Any
partial withdrawal in excess of this amount ("excess withdrawal") will be
subject to the partial withdrawal charge. The partial withdrawal charge is equal
to 5% of the excess withdrawal up to the amount of the surrender charge(s) on
the date of withdrawal. This right is not cumulative from Policy year to Policy
year. For example, if only 8% of Policy Value were withdrawn in Policy year two,
the amount you could withdraw in subsequent Policy years would not be increased
by the amount you did not withdraw in the second Policy year.
The Policy's outstanding surrender charge will be reduced by the amount of the
partial withdrawal charge deducted by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
TRANSFER CHARGES
The first 12 transfers in a Policy year will be free of charge. Thereafter, a
transfer charge of $10 will be imposed for each transfer request to reimburse
the Company for the administrative costs incurred in processing the transfer
request. The Company reserves the right to increase the charge, but it never
will exceed $25. The Company also reserves the right to change the number of
free transfers allowed in a Policy Year. See THE POLICY -- "Transfer Privilege."
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts; or
- to reallocate Policy Value among the Sub-Accounts.
The first automatic transfer counts as one transfer towards the 12 free
transfers allowed in each Policy year. Each subsequent automatic transfer is
without charge and does not reduce the remaining number of transfers which may
be made without charge.
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If you utilize the Conversion Privilege, Loan Privilege or reallocate Policy
Value within 20 days of the Date of Issue of the Policy, any resulting transfer
of Policy Value from the Sub-Accounts to the General Account will be free of
charge and in addition to the 12 free transfers in a Policy year. See THE
POLICY -- "Conversion Privileges" and POLICY LOANS.
CHARGE FOR INCREASE IN THE FACE AMOUNT
For each increase in the Face Amount you request, a transaction charge of $40
will be deducted from Policy Value to reimburse the Company for administrative
costs associated with the increase. This charge is guaranteed not to increase
and the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
Currently the Company makes no charge for the administrative costs incurred for
changing the Net Premium allocation instructions, for changing the allocation of
any Monthly Deductions among the various Sub-Accounts, or for a projection of
values. Any such charge imposed in the future is guaranteed not exceed $25.
POLICY LOANS
You may borrow against the Policy Value. Policy loans may be obtained by request
to the Company on the sole security of the Policy. The total amount which may be
borrowed is the Loan Value.
In the first Policy year, the Loan Value is 75% of the Policy Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on
Policy loan to the end of the Policy year. The Loan Value in the second Policy
year and thereafter is 90% of an amount equal to the Policy Value reduced by
applicable surrender charges. There is no minimum limit on the amount of the
loan.
The loan amount normally will be paid within seven days after the Company
receives the loan request at the Principal Office, but the Company may delay
payments under certain circumstances. See OTHER POLICY PROVISIONS --
"Postponement of Payments."
A Policy loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. The Policy Value in each Sub-Account equal to the Policy loan
allocated to such Sub-Account will be transferred to the General Account, and
the number of Accumulation Units equal to the Policy Value so transferred will
be cancelled. This will reduce the Policy Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
The Policy loan rights of Policyowners who are participants under Section 403(b)
plans or who are participants in the Texas ORP are restricted; see FEDERAL TAX
CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA PLANS."
LOAN INTEREST
LOAN AMOUNT EARNS INTEREST IN GENERAL ACCOUNT
As long as the Policy is in force, the Policy Value in the General Account equal
to the loan amount will be credited with interest at an effective annual yield
of at least 6.00%.
PREFERRED LOAN OPTION
A preferred loan option is available under the Policy. The preferred loan option
will be available upon Written Request. It may be revoked by you at any time.
You may change a preferred loan to a non-preferred loan at any time upon written
request. If this option has been selected, after the tenth Policy anniversary
the Policy Value in the General Account that is equal to the loan amount will be
credited with interest at an effective annual
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yield of at least 7.5%. The Company's current position is to credit a rate of
interest equal to the rate being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans, which may
be treated as a taxable distribution from the Policy. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION MAY NOT
BE AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Outstanding Policy loans are charged interest. Interest accrues daily and is
payable in arrears at the annual rate of 8%. Interest is due and payable at the
end of each Policy year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount and
will bear interest at the same rate. If the new loan amount exceeds the Policy
Value in the General Account after the due and unpaid interest is added to the
loan amount, the Company will transfer the Policy Value equal to that excess
loan amount from the Policy Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Policy Value
in each Sub-Account bears to the total Policy Value in all Sub-Accounts.
REPAYMENT OF LOANS
Loans may be repaid at any time prior to the lapse of the Policy. Upon repayment
of the Debt, the portion of the Policy Value that is in the General Account
securing the loan repaid will be allocated to the various Accounts and increase
the Policy Value in such Accounts in accordance with your instructions. If you
do not make a repayment allocation, the Company will allocate the Policy Value
in accordance with your most recent premium allocation instructions; provided,
however, that loan repayments allocated to the Separate Account cannot exceed
the Policy Value previously transferred from the Separate Account to secure the
Debt.
If Debt exceeds the Policy Value less the surrender charge, the Policy will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within
62 days after this notice is mailed, the Policy will terminate with no value.
See POLICY TERMINATION AND REINSTATEMENT.
EFFECT OF POLICY LOANS
Although Policy loans may be repaid at any time prior to the lapse of the
Policy, Policy loans will permanently affect the Policy Value and Surrender
Value, and may permanently affect the Death Proceeds. The effect could be
favorable or unfavorable, depending upon whether the investment performance of
the Sub-Accounts is less than or greater than the interest credited to the
Policy Value in the General Account attributable to the loan. Moreover,
outstanding Policy loans and the accrued interest will be deducted from the
proceeds payable upon the death of the Insured or surrender.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
Policy loans are permitted in accordance with the terms of the Policy. However,
if a Policy loan does not comply with the requirements of Code Section 72(p),
the Policyowner's TSA Plan may become disqualified and Policy values may be
includible in current income. Policy loans must meet the following additional
requirements:
- Loans must be repaid within five years, except when the loan is used to
acquire any dwelling unit which within a reasonable time is to be used as
the Policyowner's principal residence.
- All Policy loans must be amortized on a level basis with loan repayments
being made not less frequently than quarterly.
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- The sum of all outstanding loan balances for all loans from all the
Policyowner's TSA Plans may not exceed the lesser of:
- $50,000 reduced by the excess (if any) of
- the highest outstanding balance of loans from all of the
Policyowner's TSA Plans during the one-year period preceding the
date of the loan, minus
- the outstanding balance of loans from the Policyowner's TSA plans
on the date on which such loan was made
OR
- 50% of the Policyowner's non-forfeitable accrued benefit in all of
his/her TSA plans, but not less than $10,000.
See FEDERAL TAX CONSIDERATIONS -- "POLICIES ISSUED IN CONNECTION WITH TSA
PLANS."
POLICY TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Policy to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued; or
(b) the Debt exceeds the Policy Value less surrender charges.
If one of these situations occurs, the Policy will be in default. You then will
have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Policy. If the Insured dies during the grace period, the
Death Proceeds still will be payable, but any Monthly Deductions due and unpaid
through the Policy month in which the Insured dies, and any other overdue
charge, will be deducted from the Death Proceeds.
LIMITED 48-MONTH GUARANTEE
Except for the situation described in (b) above, the Policy is guaranteed not to
lapse during the first 48 months after the Date of Issue or the effective date
of an increase in the Face Amount if you make a minimum amount of premium
payments. The minimum amount paid, minus the Debt, partial withdrawals and
partial withdrawal charges, must be at least equal to the sum of the Minimum
Monthly Factors for the number of months the Policy, increase, or a Policy
Change which causes a change in the Minimum Monthly Factor has been in force. A
Policy Change which may cause a change in the amount of the Minimum Monthly
Factor is a change in the Face Amount or the addition or deletion of a rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the Minimum Monthly Factor do not guarantee that
the Policy will remain in force. However, see THE POLICY -- "Guaranteed Death
Benefit Rider."
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REINSTATEMENT
If the Policy has not been surrendered and the Insured is alive, the terminated
Policy may be reinstated any time within three years after the date of default
and before the Final Premium Payment Date. The reinstatement will be effective
on the Monthly Payment Date following the date you submit the following to the
Company:
- a written application for reinstatement,
- Evidence of Insurability showing that the Insured is insurable according
to the Company's underwriting rules, and
- a premium that, after the deduction of the tax expense charge, is large
enough to cover the minimum amount payable, as described below.
MINIMUM AMOUNT PAYABLE
If reinstatement is requested when fewer than 48 Monthly Deductions have been
made since the Date of Issue or the effective date of an increase in the Face
Amount, you must pay the lesser of the amount shown in (1) or (2). Under (1),
the minimum amount payable is the Minimum Monthly Factor for the three-month
period beginning on the date of reinstatement. Under (2), the minimum amount
payable is the sum of:
- the amount by which the surrender charge as of the date of reinstatement
exceeds the Policy Value on the date of default, PLUS
- Monthly Deductions for the three-month period beginning on the date of
reinstatement.
If reinstatement is requested after 48 Monthly Deductions have been made since
the Date of Issue or any increase in the Face Amount, you must pay the amount
shown in (2) above. The Company reserves the right to increase the Minimum
Monthly Factor upon reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
would have been in effect had the Policy remained in force from the Date of
Issue. The Policy Value less Debt on the date of default will be restored to the
Policy to the extent it does not exceed the surrender charge on the date of
reinstatement. Any Policy Value less Debt as of the date of default which
exceeds the surrender charge on the date of reinstatement will not be restored.
POLICY VALUE ON REINSTATEMENT
The Policy Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Policy increased by interest from
the date the payment was received at the Principal Office, PLUS
- an amount equal to the Policy Value less Debt on the date of default to
the extent it does not exceed the surrender charge on the date of
reinstatement, MINUS
- the Monthly Deduction due on the date of reinstatement.
You may not reinstate any Debt outstanding on the date of default or
foreclosure.
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OTHER POLICY PROVISIONS
The following Policy provisions may vary in certain states in order to comply
with requirements of the insurance laws, regulations and insurance regulatory
agencies in those states.
POLICYOWNER
The Policyowner is the Insured unless another Policyowner has been named in the
application for the Policy. The Policyowner generally is entitled to exercise
all rights under the Policy while the Insured is alive, subject to the consent
of any irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured is required whenever the Face Amount of
insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Policy, the
Beneficiary has no rights in the Policy before the death of the Insured. While
the Insured is alive, you may change any Beneficiary unless you have declared a
Beneficiary to be irrevocable. If no Beneficiary is alive when the Insured dies,
the Policyowner (or the Policyowner's estate) will be the Beneficiary. If more
than one Beneficiary is alive when the Insured dies, they will be paid in equal
shares, unless you have chosen otherwise. Where there is more than one
Beneficiary, the interest of a Beneficiary who dies before the Insured will pass
to surviving Beneficiaries proportionately, unless otherwise requested.
INCONTESTABILITY
The Company will not contest the validity of the Policy after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Policy, without interest, and less any
outstanding Debt and any partial withdrawals. If the Insured commits suicide,
generally within two years from the effective date of any increase in the Sum
Insured, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.
AGE AND SEX
If the Insured's Age or sex as stated in the application for the Policy is not
correct, benefits under the Policy will be adjusted to reflect the correct Age
and sex, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age and sex. In no event will the Sum Insured be
reduced to less than the Guideline Minimum Sum Insured. In the case of a Policy
issued on a unisex basis, this provision as it relates to misstatement of sex
does not apply.
ASSIGNMENT
The Policyowner may assign the Policy as collateral or make an absolute
assignment of the Policy. All rights under the Policy will be transferred to the
extent of the assignee's interest. The consent of the assignee may be required
in order to make changes in premium allocations, to make transfers, or to
exercise other rights under
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<PAGE>
the Policy. The Company is not bound by an assignment or release thereof, unless
it is in writing and is recorded at the Principal Office. When recorded, the
assignment will take effect as of the date the Written Request was signed. Any
rights created by the assignment will be subject to any payments made or actions
taken by the Company before the assignment is recorded. The Company is not
responsible for determining the validity of any assignment or release.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Policy loan and
transfers, may be postponed whenever: (1) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Policy of any
amounts derived from the premiums paid by check may be delayed until such time
as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal or death of the Insured, as
well as payments of Policy loans and transfers from the General Account, for a
period not to exceed six months.
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Vice President and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller
Vice President and (since 1998) of First Allmerica
Corporate Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Mary Eldridge Secretary (since 1999) of Allmerica Financial;
Secretary Secretary (since 1999) of Allmerica
Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management
Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and and Vice President (since 1991) of First Allmerica;
Chief Investment Officer Vice President (since 1998) of Allmerica Financial
Investment Management Services, Inc.; and President
(since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Mark C. McGivney Vice President (since 1997) and Treasurer (since
Vice President and Treasurer 2000) of First Allmerica; Associate, Investment
Banking (1996-1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc.
and Allmerica Financial Investment Management
Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer
Director, President and Chief (since 1989) of First Allmerica
Executive Officer
Edward J. Parry, III Director and Chief Financial Officer (since 1996),
Director, Vice President, Vice President (since 1993), and Treasurer
Chief Financial Officer (1993-2000) of First Allmerica
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; President (since 1995) of
Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director and Vice President Allmerica; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly owned subsidiary of the Company,
acts as the principal underwriter of the Policies pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer, and
is a member of the National Association of Securities Dealers ("NASD"). The
Policies are sold by agents of the Company who are registered representatives of
Allmerica Investments, Inc., or of certain independent broker-dealers which are
members of the NASD.
The Company pays registered representatives who sell the Policy commissions
based on a commission schedule. After issue of the Policy or an increase in Face
Amount, commissions generally will equal 50 percent of the first-year premiums
up to a basic premium amount established by the Company. Thereafter, commissions
will generally equal 4% of any additional premiums. Certain registered
representatives, including registered representatives enrolled in the Company's
training program for new agents, may receive additional first-year and renewal
commissions and training reimbursements. General Agents of the Company and
certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 10% of first-year or
14% of renewal premiums.
The Company intends to recoup the commission and other sales expense through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, and the investment earnings on amounts allocated
to accumulate on a fixed basis in excess of the interest credited on
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<PAGE>
fixed accumulations by the Company. There is no additional charge to
Policyowners or the Separate Account. Any surrender charge assessed on the
Policy will be retained by the Company except for amounts it may pay to
Allmerica Investments, Inc. for services it performs and expenses it may incur
as principal underwriter and general distributor.
REPORTS
The Company will maintain the records relating to the Separate Account.
Statements of significant transactions such as premium payments, changes in
specified Face Amount, changes in Sum Insured Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement will be sent to you promptly. An annual statement also will be
sent to you within 30 days after a Policy anniversary. The annual statement will
summarize all of the above transactions and deductions of charges during the
Policy year. It also will set forth the status of the Death Proceeds, Policy
Value, Surrender Value, amounts in the Sub-Accounts and General Account, and any
Policy loans. The Owner should review the information in all statements
carefully. All errors or corrections must reported to the Company immediately to
assure proper crediting to the Contract. The Company will assume that all
transactions are accurately reported on confirmation statements and
quarterly/annual statements unless the Owner notifies the Principal Office in
writing within 30 days after receipt of the statement. In addition, you will be
sent periodic reports containing financial statements and other information for
the Separate Account and the Underlying Funds as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company and
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Separate Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Policy and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements of the VEL II Account of the Company as of December 31, 1999 and for
the periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Policy, on loans,
withdrawals, or surrenders, on death benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they currently are interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely and,
possibly retroactively, affect the taxation of the Policy. No representation is
made
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<PAGE>
regarding the likelihood of continuation of current federal income tax laws or
of current interpretations by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Policy is not exhaustive, does not purport to
cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Policyowner is a corporation or the trustee of an employee benefit plan.
A qualified tax adviser always should be consulted with regard to the
application of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code,
and files a consolidated tax return with its parent and affiliates. The Company
does not expect to incur any income tax upon the earnings or realized capital
gains attributable to the Separate Account. Based on this, no charge is made for
federal income taxes which may be attributable to the Separate Account.
Periodically, the Company will review the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company ultimately is determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account. Under current laws the Company also may incur state and local taxes (in
addition to premium taxes) in several states. At present these taxes are not
significant. If there is a material change in applicable state or local tax
laws, charges may be made for such taxes paid, or reserves for such taxes,
attributable to the Separate Account.
TAXATION OF THE POLICY
The Company believes that the Policy described in this Prospectus will be
considered a life insurance contract under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies, and places
limitations on the relationship of the Policy Value to the Insurance Amount at
Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in the Policy Value is not
taxable until received by the Policyowner or the Policyowner's designee. But see
"Modified Endowment Policies."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury Department regulations in order to be
treated as a life insurance policy for tax purposes. Although the Company does
not have control over the investments of the Underlying Funds, the Company
believes that the Underlying Funds currently meet the Treasury's diversification
requirements. The Company will monitor continued compliance with these
requirements. In connection with the issuance of previous regulations relating
to diversification requirements, the Treasury Department announced that such
regulations do not provide guidance concerning the extent to which Policyowners
may direct their investments to particular divisions of a separate account.
Regulations in this regard may be issued in the future. It is possible that if
and when regulations are issued, the Policy may need to be modified to comply
with such regulations. For these reasons, the Policy or the Company's
administrative rules may be modified as necessary to prevent a Policyowner from
being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Sum Insured Option, change in the Face Amount, lapse with Policy loan
outstanding or assignment of the Policy may have tax consequences. In
particular, under specified conditions, a distribution under the Policy during
the first 15 years from Date of Issue that reduces future benefits under the
Policy will be taxed to the Policyowner as ordinary income to the extent of any
investment earnings in the Policy. Federal, state and local income, estate,
55
<PAGE>
inheritance, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policyowner or
Beneficiary.
POLICY LOANS
The Company believes that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policyowner for federal income tax purposes.
Under current law, these loans will not constitute income for the Policyowner
while the Policy is in force (but see "Modified Endowment Policies"). There is a
risk, however, that a preferred loan may be characterized by the IRS as a
withdrawal, and taxed accordingly. At the present time, the IRS has not issued
any guidance on whether loans with the attributes of a preferred loan should be
treated differently than a non-preferred loan. This lack of specific guidance
makes the tax treatment of preferred loans uncertain. In the event pertinent IRS
guidelines are issued in the future, you may convert your preferred loan to a
non-preferred loan. However, it is possible that, notwithstanding the
conversion, some or all of the loan could be treated as a taxable distribution
from the Policy.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans if the Insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
business-owned policies covering officers or 20-percent owners, up to a maximum
equal to the greater of (1) five individuals, or (2) the lesser of (a) 5% of the
total number of officers and employees of the corporation, or (b) 20
individuals.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
The Policies may be issued in connection with tax-sheltered annuity plans ("TSA
Plans") of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code.
Under the provisions of Section 403(b) of the Code, payments made for annuity
policies purchased for employees under TSA Plans are excludable from the gross
income of such employees, to the extent that the aggregate purchase payments in
any year do not exceed the maximum contribution permitted under the Code. The
Company has received a Private Letter Ruling with respect to the status of the
Policies as providing "incidental life insurance" when issued in connection with
TSA Plans. In the Private Letter Ruling, the IRS has taken the position that the
purchase of a life insurance policy by the employer as part of a TSA Plan will
not violate the "incidental benefit" rules of Section 403(b) and the regulations
thereunder. The Private Letter Ruling also stated that the use of current or
accumulated contributions to purchase a life insurance policy will not result in
current taxation of the premium payments for the life insurance policy, except
for the current cost of the life insurance protection.
A policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings) may not begin before the employee attains age
59 1/2, separates from service, dies, or becomes disabled. In the case of
hardship, a Policyowner may withdraw amounts contributed by salary reduction,
but not the earnings on such amounts. Even though a distribution may be
permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax.
Policy loans are generally permitted in accordance with the terms of the policy.
However, if a policy loan does not comply with the requirements of Code
Section 72(p), the policyowner's TSA Plan may become disqualified and policy
values may be includible in current income.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("the 1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance policy, including the Policy
offered by this Prospectus, that fails to satisfy a "seven-pay" test is
considered a
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<PAGE>
modified endowment contract. The Policy would fail to satisfy the seven-pay test
if the cumulative premiums paid under the Policy at any time during the first
seven Policy years (or within seven years of a material change in the Policy)
exceed the sum of the net level premiums that would have been paid, had the
Policy provided for paid-up future benefits after the payment of seven level
annual premiums. In addition, if benefits are reduced at anytime during the life
of the Policy, there may be adverse tax consequences. Please consult your tax
adviser.
If the Policy is considered a modified endowment contract, all distributions
under the Policy will be taxed on an "income-first" basis. Most distributions
received by the Policyowner directly or indirectly (including loans,
withdrawals, surrenders, or the assignment or pledge of any portion of the
Policy Value) will be includible in gross income to the extent that the
Surrender Value of the Policy exceeds the Policyowner's investment in the
Policy. Any additional amounts will be treated as a return of capital to the
extent of the Policyowner's basis in the Policy. With certain exceptions, an
additional 10% tax will be imposed on the portion of any distribution that is
includible in income. All modified endowment contracts issued by the same
insurance company to the same policyowner during any calendar period will be
treated as a single modified endowment contract in determining taxable
distributions.
Currently, each Policy is reviewed when premiums are received to determine if it
satisfies the seven-pay test. If the Policy does not satisfy the seven-pay test,
the Company will notify the Policyowner of the option of requesting a refund of
the excess premium. The refund process must be completed within 60 days after
the Policy anniversary, or the Policy will be classified permanently as a
modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Policy Value to
the General Account. Because of exemption and exclusionary provisions in the
securities law, any amount in the General Account generally is not subject to
regulation under the provisions of the 1933 Act or the 1940 Act. Accordingly,
the disclosures in this section have not been reviewed by the SEC. Disclosures
regarding the fixed portion of the Policy and the General Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws concerning the accuracy and completeness of statements made in
prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUES AND POLICY LOANS
The Company bears the full investment risk for amounts allocated to the General
Account, and guarantees that interest credited to each Policyowner's Policy
Value in the General Account will not be less than an annual rate of 4%
("Guaranteed Minimum Rate").
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of 4% per year, and might not do so. The excess interest rate, if any, in effect
on the date a premium is received at the Principal Office, however, is
guaranteed on that premium for one year, unless the Policy Value associated with
the premium becomes security for a Policy loan. AFTER SUCH
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<PAGE>
INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON
THE POLICY'S ACCUMULATED VALUE IN THE GENERAL ACCOUNT IN EXCESS OF THE
GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION OF
THE COMPANY. THE POLICYOWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT
EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Policy Value which is
equal to the Debt. Such Policy Value, however, will be credited interest at an
effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Payment Date, the Policy Value in
the General Account will be the amount of the Net Premiums allocated or the
Policy Value transferred to the General Account, plus interest at an annual rate
of 4%, plus any excess interest which the Company credits, less the sum of all
Policy charges allocable to the General Account and any amounts deducted from
the General Account in connection with loans, partial withdrawals, surrenders or
transfers.
Policy loans also may be made from the Policy Value in the General Account.
THE POLICY
This Prospectus describes a flexible premium variable life insurance policy, and
is intended generally to serve as a disclosure document only for the aspects of
the Policy relating to the Separate Account. For complete details regarding the
General Account, see the Policy itself.
DELAY OF PAYMENTS
Transfers, surrenders, partial withdrawals, Death Proceeds and Policy loans
payable from the General Account may be delayed up to six months. If payment is
delayed for 30 days (10 days in New York) or more, however, the Company will pay
interest at least equal to an effective annual yield of 3 1/2% for the period of
deferment. Amounts from the General Account used to pay premiums on policies
with the Company will not be delayed.
SURRENDERS, PARTIAL WITHDRAWALS, AND TRANSFERS
If the Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed. In the event
of a decrease in the Face Amount, the surrender charge deducted is a fraction of
the charge that would apply to a full surrender of the Policy. Partial
withdrawals are made on a last-in/first-out basis from the Policy Value
allocated to the General Account. This means that the last payments allocated to
General Account will be withdrawn first.
The first 12 transfers in a Policy year are free of charge. Thereafter, a $10
transfer charge will be deducted for each transfer in that Policy year. The
transfer privilege is subject to the consent of the Company and to the Company's
then current rules.
FINANCIAL STATEMENTS
Financial Statements for the Company and the Separate Account are included in
this Prospectus beginning immediately after the Appendices. The financial
statements of the Company should be considered only as bearing on the ability of
the Company to meet its obligations under the Policy. They should not be
considered as bearing on the investment performance of the assets held in the
Separate Account.
58
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. For more information, contact your agent.
The following supplemental benefits are available for issue under the Policy for
an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that during periods of total disability, continuing more
than four months, the Company will add to the Policy Value each month an
amount selected by you or the amount needed to pay the Policy charges,
whichever is greater. This value will be used to keep the Policy in force.
This benefit is subject to the Company's maximum issue benefits. Its cost
will change yearly.
GUARANTEED INSURABILITY RIDER
This Rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the
option dates even if the Insured is disabled.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Policy.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Policy anniversary nearest the Insured's Age 70.
EXCHANGE OPTION RIDER
This Rider allows you to use the Policy to insure a different person,
subject to Company guidelines.
LIVING BENEFITS RIDER
This Rider permits part of the proceeds of the Policy to be available before
death if the Insured becomes terminally ill or is permanently confined to a
nursing home.
GUARANTEED DEATH BENEFIT RIDER
This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE, (a) guarantees that
the Policy will not lapse regardless of the performance of the Separate
Account, and (b) provides a guaranteed net death benefit.
Certain of these Riders may not be available in all states.
A-1
<PAGE>
APPENDIX B
DEATH PROCEEDS PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options below or any other option
offered by the Company. If you do not make an election, the Company will pay the
benefits in a single sum. A certificate will be provided to the payee describing
the payment option selected. If a payment option is selected, the Beneficiary
may pay to the Company any amount that would otherwise be deducted from the Sum
Insured.
The amounts payable under a payment option for each $1,000 value applied will be
the greater of:
- The rate per $1,000 of value applied based on the Company's non-guaranteed
current payment option rates for the Policy, or
- The rate in the Policy for the applicable payment option.
The following payment options are currently available. The amounts payable under
these options are paid from the General Account. None is based on the investment
experience of the Separate Account.
<TABLE>
<C> <S>
Option A: PAYMENTS FOR A SPECIFIED NUMBER OF YEARS. The Company will
make equal payments for any selected number of years (not
greater than 30). Payments may be made annually, semi-
annually, quarterly or monthly.
Option B: LIFETIME MONTHLY PAYMENTS. Payments are based on the payee's
age on the date the first payment will be made. One of three
variations may be chosen. Depending upon this choice,
payments will end:
(1) upon the death of the payee, with no further payments due
(Life Annuity), or
(2) upon the death of the payee, but not before the sum of the
payments made first equals or exceeds the amount applied
under this option (Life Annuity with Installment Refund), or
(3) upon the death of the payee, but not before a selected
period (5, 10 or 20 years) has elapsed (Life Annuity with
Period Certain).
Option C: INTEREST PAYMENTS. The Company will pay interest at a rate
determined by the Company each year, but which will not be
less than 3.5%. Payments may be made annually, semi-
annually, quarterly or monthly. Payments will end when the
amount left with the Company has been withdrawn. However,
payments will not continue after the death of the payee. Any
unpaid balance plus accrued interest will be paid in a lump
sum.
Option D: PAYMENTS FOR A SPECIFIED AMOUNT. Payments will be made until
the unpaid balance is exhausted. Interest will be credited
to the unpaid balance. The rate of interest will be
determined by the Company each year, but will not be less
than 3.5%. Payments may be made annually, semi-annually,
quarterly or monthly. The payment level selected must
provide for the payment each year of at least 8% of the
amount applied.
Option E. LIFETIME MONTHLY PAYMENTS FOR TWO PAYEES. One of three
variations may be chosen. After the death of one payee,
payments will continue to the survivor:
(1) in the same amount as the original amount; or
(2) in an amount equal to 2/3 of the original amount; or
(3) in an amount equal to 1/2 of the original amount.
</TABLE>
Payments are based on the payees' ages on the date the first payment is due.
Payments will end upon the death of the surviving payee.
B-1
<PAGE>
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
If the amount of monthly income payments under Option B(3) for the attained age
of the payee are the same for different periods certain, the Company will deem
an election to have been made for the longest period certain which could have
been elected for such age and amount.
You may give the Beneficiary the right to change from Option C or D to any other
option at any time. If the payee selects Option C or D when the Policy becomes a
claim, the right may be reserved to change to any other option. The payee who
elects to change options must be a payee under the option selected.
ADDITIONAL DEPOSITS
An additional deposit may be made to any proceeds when they are applied under
Option B or E. A charge not to exceed 3% will be made. The Company may limit the
amount of this deposit.
RIGHTS AND LIMITATIONS
A payee does not have the right to assign any amount payable under any option. A
payee does not have the right to commute any amount payable under Option B or E.
A payee will have the right to commute any amount payable under Option A only if
the right is reserved in the Written Request selecting the option. If the right
to commute is exercised, the commuted values will be computed at the interest
rates used to calculate the benefits. The amount left under Option C, and any
unpaid balance under Option D, may be withdrawn by the payee only as set forth
in the Written Request selecting the option.
A corporation or fiduciary payee may select only Option A, C or D. Such
selection will be subject to the consent of the Company.
PAYMENT DATES
The first payment under any option, except Option C, will be due on the date the
Policy matures by death or otherwise, unless another date is designated.
Payments under Option C begin at the end of the first payment period.
The last payment under any option will be made as stated in the description of
that option. However, should a payee under Option B or E die prior to the due
date of the second monthly payment, the amount applied less the first monthly
payment will be paid in a lump sum or under any option other than Option E. A
lump sum payment will be made to the surviving payee under Option E or the
succeeding payee under Option B.
B-2
<PAGE>
APPENDIX C
ILLUSTATIONS OF SUM INSURED, POLICY VALUES
AND ACCUMULATED PREMIUMS
The following tables illustrate the way in which the Policy's Sum Insured and
the Policy Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Policy issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Policy issued to
a male, Age 45, under a standard Premium Class and qualifying for the non-smoker
discount. In each case, one table illustrates the guaranteed cost of insurance
rates and the other table illustrates the current cost of insurance rates as
presently in effect.
The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown. The tables are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if the premiums were invested each year
to earn interest (after taxes) at 5%, compounded annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of the
Policy's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12%, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Policy Values take into account the
deduction from premium for the tax expense charge, the Monthly Deduction from
Policy Value, the daily charge against the Separate Account for mortality and
expense risks, and the Separate Account administrative charge (for the first ten
Policy years). In the Current Cost of Insurance Charges tables, the Separate
Account charges are equivalent to an effective annual rate of 0.80% of the
average daily value of the assets in the Separate Account in the first ten
Policy Years, and 0.65% thereafter. In the Guaranteed Cost of Insurance Charges
tables, the Separate Account charges are equivalent to an effective annual rate
of 1.15% of the average daily value of the assets in the Separate Account in the
first ten Policy Years, and 0.90% thereafter.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1999, ranged from an
annual rate of 0.29% to an annual rate of 1.92% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10% for Select Growth
and Income Fund, 1.00% for Select Investment Grade Income Fund, and Government
Bond Fund, and 0.60% for Money Market
C-1
<PAGE>
Fund and Equity Index Fund. The total operating expenses of these Funds of the
Trust were less than their respective expense limitations throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-advisor. Until further notice, the Select Value Opportunity
Fund's management fee rate has been voluntarily limited to an annual rate of
0.90% of average daily net assets, and total expenses are limited to 1.25% of
average daily net assets. The declaration of a voluntary management fee or
expense limitation in any year does not bind AFIMS to declare future expense
limitations with respect to these Funds. These limitations may be terminated at
any time.
The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
In the Current Cost of Insurance Charges tables, taking into account the current
Separate Account mortality and expense risk charge, the current Separate Account
administrative charge, and the assumed 0.85% charge for Underlying Fund advisory
fees and operating expenses, the gross annual rates of investment return of 0%,
6% and 12% correspond to net annual rates of -1.65%, 4.35% and 10.35%,
respectively, during the first ten Policy years and -1.50%, 4.50% and 10.50%,
respectively, thereafter.
In the Guaranteed Cost of Insurance Charges tables, taking into account the
guaranteed Separate Account mortality and expense risk charge, the guaranteed
Separate Account administrative charge, and the assumed 0.85% charge for
Underlying Fund advisory fees and operating expenses, the gross annual rates of
investment return of 0%, 6% and 12% correspond to net annual rates of -2.00%,
4.00% and 10.00%, respectively, during the first ten Policy years and -1.75%,
4.25% and 10.25%, respectively, thereafter.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
TO CHOOSE THE SUB-ACCOUNTS WHICH BEST WILL MEET YOUR NEEDS AND OBJECTIVES,
CAREFULLY READ THE PROSPECTUSES OF THE UNDERLYING FUNDS ALONG WITH THIS
PROSPECTUS.
C-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------- ----------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------ --------- --------- ------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,252 250,000 130 3,473 250,000 351 3,694 250,000
2 9,041 2,680 6,404 250,000 3,326 7,050 250,000 4,000 7,724 250,000
3 13,903 4,717 9,440 250,000 5,997 10,719 250,000 7,384 12,107 250,000
4 19,008 7,830 12,364 250,000 9,953 14,487 250,000 12,351 16,884 250,000
5 24,368 10,923 15,174 250,000 14,104 18,355 250,000 17,847 22,097 250,000
6 29,996 13,886 17,853 250,000 18,344 22,311 250,000 23,808 27,775 250,000
7 35,906 16,734 20,418 250,000 22,691 26,374 250,000 30,301 33,985 250,000
8 42,112 19,464 22,864 250,000 27,146 30,546 250,000 37,384 40,784 250,000
9 48,627 22,075 25,192 250,000 31,717 34,834 250,000 45,123 48,239 250,000
10 55,469 24,556 27,389 250,000 36,396 39,230 250,000 53,581 56,414 250,000
11 62,652 27,358 29,625 250,000 41,657 43,924 250,000 63,328 65,595 250,000
12 70,195 30,034 31,734 250,000 47,057 48,757 250,000 74,010 75,710 250,000
13 78,114 32,566 33,700 250,000 52,590 53,723 250,000 85,723 86,857 250,000
14 86,430 34,944 35,511 250,000 58,255 58,822 250,000 98,589 99,156 250,000
15 95,161 37,152 37,152 250,000 64,049 64,049 250,000 112,742 112,742 250,000
16 104,330 38,640 38,640 250,000 69,430 69,430 250,000 127,790 127,790 250,000
17 113,956 39,952 39,952 250,000 74,961 74,961 250,000 144,479 144,479 250,000
18 124,064 41,071 41,071 250,000 80,642 80,642 250,000 163,016 163,016 250,000
19 134,677 41,953 41,953 250,000 86,453 86,453 250,000 183,636 183,636 250,000
20 145,821 42,624 42,624 250,000 92,433 92,433 250,000 206,641 206,641 252,102
Age 60 95,161 37,152 37,152 250,000 64,049 64,049 250,000 112,742 112,742 250,000
Age 65 145,821 42,624 42,624 250,000 92,433 92,433 250,000 206,641 206,641 252,102
Age 70 210,477 41,947 41,947 250,000 125,077 125,077 250,000 362,587 362,587 420,601
Age 75 292,995 31,958 31,958 250,000 164,097 164,097 250,000 616,513 616,513 659,669
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------- ----------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------ --------- --------- ------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,154 250,000 29 3,372 250,000 248 3,591 250,000
2 9,041 2,465 6,189 250,000 3,099 6,823 250,000 3,760 7,484 250,000
3 13,903 4,383 9,105 250,000 5,631 10,354 250,000 6,986 11,709 250,000
4 19,008 7,368 11,901 250,000 9,431 13,965 250,000 11,764 16,298 250,000
5 24,368 10,321 14,571 250,000 13,402 17,653 250,000 17,031 21,281 250,000
6 29,996 13,147 17,113 250,000 17,452 21,418 250,000 22,734 26,701 250,000
7 35,906 15,833 19,517 250,000 21,569 25,253 250,000 28,905 32,589 250,000
8 42,112 18,369 21,769 250,000 25,745 29,145 250,000 35,586 38,986 250,000
9 48,627 20,745 23,861 250,000 29,974 33,090 250,000 42,823 45,940 250,000
10 55,469 22,945 25,778 250,000 34,241 37,075 250,000 50,665 53,499 250,000
11 62,652 25,314 27,581 250,000 38,925 41,192 250,000 59,601 61,867 250,000
12 70,195 27,487 29,187 250,000 43,646 45,346 250,000 69,309 71,009 250,000
13 78,114 29,458 30,591 250,000 48,402 49,535 250,000 79,884 81,017 250,000
14 86,430 31,215 31,782 250,000 53,188 53,755 250,000 91,429 91,996 250,000
15 95,161 32,735 32,735 250,000 57,990 57,990 250,000 104,058 104,058 250,000
16 104,330 33,430 33,430 250,000 62,228 62,228 250,000 117,337 117,337 250,000
17 113,956 33,839 33,839 250,000 66,453 66,453 250,000 131,992 131,992 250,000
18 124,064 33,926 33,926 250,000 70,642 70,642 250,000 148,203 148,203 250,000
19 134,677 33,646 33,646 250,000 74,767 74,767 250,000 166,189 166,189 250,000
20 145,821 32,949 32,949 250,000 78,798 78,798 250,000 186,213 186,213 250,000
Age 60 95,161 32,735 32,735 250,000 57,990 57,990 250,000 104,058 104,058 250,000
Age 65 145,821 32,949 32,949 250,000 78,798 78,798 250,000 186,213 186,213 250,000
Age 70 210,477 21,466 21,466 250,000 96,725 96,725 250,000 322,840 322,840 374,494
Age 75 292,995 0 0 250,000 106,594 106,594 250,000 540,675 540,675 578,522
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------- ----------------------------- -----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------ --------- --------- ------- --------- --------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 302 1,195 76,195 379 1,273 76,273 456 1,350 76,350
2 3,014 1,364 2,367 77,367 1,593 2,597 77,597 1,832 2,836 77,836
3 4,634 2,513 3,516 78,516 2,971 3,975 78,975 3,467 4,471 79,471
4 6,336 3,678 4,641 79,641 4,444 5,407 80,407 5,307 6,270 81,270
5 8,123 4,839 5,743 80,743 5,994 6,897 81,897 7,347 8,251 83,251
6 9,999 5,977 6,820 81,820 7,603 8,446 83,446 9,587 10,430 85,430
7 11,969 7,091 7,874 82,874 9,273 10,056 85,056 12,045 12,828 87,828
8 14,037 8,176 8,898 83,898 11,001 11,723 86,723 14,739 15,462 90,462
9 16,209 9,236 9,898 84,898 12,793 13,456 88,456 17,698 18,360 93,360
10 18,490 10,261 10,863 85,863 14,642 15,244 90,244 20,936 21,539 96,539
11 20,884 11,366 11,848 86,848 16,672 17,154 92,154 24,618 25,100 100,100
12 23,398 12,449 12,810 87,810 18,779 19,141 94,141 28,665 29,026 104,026
13 26,038 13,507 13,747 88,747 20,965 21,206 96,206 33,112 33,353 108,353
14 28,810 14,538 14,658 89,658 23,232 23,352 98,352 38,001 38,121 113,121
15 31,720 15,540 15,540 90,540 25,579 25,579 100,579 43,374 43,374 118,374
16 34,777 16,393 16,393 91,393 27,889 27,889 102,889 49,162 49,162 124,162
17 37,985 17,209 17,209 92,209 30,279 30,279 105,279 55,531 55,531 130,531
18 41,355 17,987 17,987 92,987 32,750 32,750 107,750 62,542 62,542 137,542
19 44,892 18,726 18,726 93,726 35,304 35,304 110,304 70,260 70,260 145,260
20 48,607 19,425 19,425 94,425 37,942 37,942 112,942 78,757 78,757 153,757
Age 60 97,665 24,042 24,042 99,042 69,600 69,600 144,600 229,263 229,263 307,212
Age 65 132,771 24,104 24,104 99,104 89,105 89,105 164,105 380,579 380,579 464,307
Age 70 177,576 21,796 21,796 96,796 110,681 110,681 185,681 625,389 625,389 725,452
Age 75 234,759 16,149 16,149 91,149 133,533 133,533 208,533 1,023,378 1,023,378 1,098,378
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARI-EXCEPTIONAL LIFE POLICY
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------- ----------------------------- -----------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------ --------- --------- ------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 281 1,175 76,175 358 1,252 76,252 435 1,328 76,328
2 3,014 1,321 2,324 77,324 1,547 2,551 77,551 1,784 2,787 77,787
3 4,634 2,444 3,448 78,448 2,896 3,900 78,900 3,386 4,389 79,389
4 6,336 3,582 4,546 79,546 4,336 5,299 80,299 5,184 6,148 81,148
5 8,123 4,714 5,617 80,617 5,846 6,749 81,749 7,174 8,077 83,077
6 9,999 5,818 6,661 81,661 7,409 8,252 83,252 9,351 10,194 85,194
7 11,969 6,895 7,678 82,678 9,025 9,808 84,808 11,733 12,515 87,515
8 14,037 7,944 8,667 83,667 10,695 11,418 86,418 14,338 15,060 90,060
9 16,209 8,964 9,627 84,627 12,421 13,083 88,083 17,188 17,850 92,850
10 18,490 9,955 10,557 85,557 14,202 14,804 89,804 20,306 20,908 95,908
11 20,884 11,005 11,487 86,487 16,141 16,623 91,623 23,834 24,315 99,315
12 23,398 12,026 12,387 87,387 18,144 18,505 93,505 27,696 28,057 103,057
13 26,038 13,018 13,259 88,259 20,212 20,453 95,453 31,928 32,169 107,169
14 28,810 13,978 14,099 89,099 22,348 22,468 97,468 36,565 36,685 111,685
15 31,720 14,909 14,909 89,909 24,552 24,552 99,552 41,648 41,648 116,648
16 34,777 15,686 15,686 90,686 26,706 26,706 101,706 47,099 47,099 122,099
17 37,985 16,429 16,429 91,429 28,930 28,930 103,930 53,088 53,088 128,088
18 41,355 17,138 17,138 92,138 31,227 31,227 106,227 59,667 59,667 134,667
19 44,892 17,811 17,811 92,811 33,597 33,597 108,597 66,896 66,896 141,896
20 48,607 18,447 18,447 93,447 36,041 36,041 111,041 74,838 74,838 149,838
Age 60 97,665 21,926 21,926 96,926 64,210 64,210 139,210 212,685 212,685 287,685
Age 65 132,771 20,604 20,604 95,604 79,970 79,970 154,970 347,810 347,810 424,328
Age 70 177,576 15,553 15,553 90,553 94,955 94,955 169,955 562,015 562,015 651,937
Age 75 234,759 4,472 4,472 79,472 105,993 105,993 180,993 901,850 901,850 976,850
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Policy year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause the Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE THAT THESE
HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is calculated upon issuance of the Policy and upon
each increase in the Face Amount. The maximum surrender charge is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge equal to
$8.50 per $1,000 of initial Face Amount (or Face Amount increase), and (b) is a
deferred sales charge of 49% of premiums received up to a maximum number of
Guideline Annual Premiums (GAPs) subject to the deferred sales charge that
varies by issue Age or average Age at time of increase, as applicable:
<TABLE>
<CAPTION>
APPLICABLE AGE MAXIMUM GAPS APPLICABLE AGE MAXIMUM GAPS
- -------------- --------------- -------------- ---------------
<S> <C> <C> <C>
0-55 1.660714 68 1.290612
56 1.632245 69 1.262143
57 1.603776 70 1.233673
58 1.575306 71 1.205204
59 1.546837 72 1.176735
60 1.518367 73 1.148265
61 1.489898 74 1.119796
62 1.461429 75 1.091327
63 1.432959 76 1.062857
64 1.404490 77 1.034388
65 1.376020 78 1.005918
66 1.347551 79 0.977449
67 1.319082 80 0.948980
</TABLE>
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Policy and upon each
increase in the Face Amount are shown in the table below. During the first two
Policy years following issue or an increase in the Face Amount, the actual
surrender charge may be less than the maximum. See CHARGES AND DEDUCTIONS --
"Surrender Charge."
The maximum surrender charge initially remains level and then grades down
according to the following schedule:
<TABLE>
<CAPTION>
AGES
- ----
<S> <C>
0-50 The maximum surrender charge remains level for the first 40
Policy months, reduces by 0.5% for the next 80 Policy
months, then decreases by 1% per month to zero at the end of
180 Policy months (15 Policy years).
51 and above The maximum surrender charge remains level for 40 Policy
months and decreases per month by above the percentages
below:
age 51 - 0.78% per month for 128 months
age 52 - 0.86% per month for 116 months
age 53 - 0.96% per month for 104 months
age 54 - 1.09% per month for 92 months
age 55 and over - 1.25% per month for 80 months
</TABLE>
D-1
<PAGE>
The Factors used in calculating the maximum surrender charges vary with the
issue Age, sex and Premium Class (Smoker) as indicated in the table below:
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
Issue or Male Male Female Female
Increase Nonsmoker Smoker Nonsmoker Smoker
- -------- --------- ------ --------- ------
<S> <C> <C> <C> <C>
0 8.63 7.68
1 8.63 7.70
2 8.78 7.81
3 8.94 7.93
4 9.10 8.05
5 9.27 8.18
6 9.46 8.32
7 9.65 8.47
8 9.86 8.62
9 10.08 8.78
10 10.31 8.95
11 10.55 9.13
12 10.81 9.32
13 11.07 9.51
14 11.34 9.71
15 11.62 9.92
16 11.89 10.14
17 12.16 10.36
18 10.65 12.44 9.73 10.59
19 10.87 12.73 9.93 10.83
20 11.10 13.02 10.15 11.09
21 11.34 13.33 10.37 11.35
22 11.59 13.66 10.60 11.63
23 11.85 14.01 10.85 11.92
24 12.14 14.38 11.10 12.22
25 12.44 14.77 11.37 12.54
26 12.75 15.19 11.66 12.88
27 13.09 15.64 11.95 13.23
28 13.45 16.11 12.26 13.60
29 13.83 16.62 12.59 13.99
30 14.23 17.15 12.93 14.40
31 14.66 17.72 13.29 14.83
32 15.10 18.32 13.67 15.28
33 15.58 18.96 14.07 15.75
34 16.08 19.63 14.49 16.25
35 16.60 20.35 14.93 16.77
36 17.16 21.10 15.39 17.33
37 17.75 21.89 15.88 17.91
38 18.37 22.73 16.39 18.51
39 19.02 23.55 16.93 19.15
40 19.71 24.28 17.50 19.81
41 20.44 25.04 18.09 20.51
42 21.20 25.85 18.71 21.23
43 22.02 26.71 19.36 21.98
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
Age at
Issue or Male Male Female Female
Increase Nonsmoker Smoker Nonsmoker Smoker
- -------- --------- ------ --------- ------
<S> <C> <C> <C> <C>
44 22.87 27.61 20.04 22.77
45 23.61 28.56 20.76 23.56
46 24.36 29.57 21.52 24.23
47 25.15 30.63 22.33 24.94
48 26.00 31.16 23.14 24.69
49 26.90 32.95 23.83 26.47
50 27.85 34.21 24.57 27.31
51 28.87 35.56 25.35 28.18
52 29.96 36.99 26.17 29.11
53 31.12 38.25 27.05 30.09
54 32.56 38.25 27.95 31.12
55 33.67 38.25 28.97 32.21
56 34.62 38.25 29.65 32.94
57 35.61 38.25 30.36 33.70
58 36.65 38.25 31.11 34.49
59 37.73 38.25 32.74 36.23
60 38.25 38.25 32.74 36.23
61 38.25 38.25 33.63 37.18
62 38.25 38.25 34.57 38.18
63 38.25 38.25 35.56 38.25
64 38.25 38.25 36.60 38.25
65 38.25 38.25 37.68 38.25
66 38.25 38.25 38.25 38.25
67 38.25 38.25 38.25 38.25
68 38.25 38.25 38.25 38.25
69 38.25 38.25 38.25 38.25
70 38.25 38.25 38.25 38.25
71 38.25 38.25 38.25 38.25
72 38.25 38.25 38.25 38.25
73 38.25 38.25 38.25 38.25
74 38.25 38.25 38.25 38.25
75 38.25 38.25 38.25 38.25
76 38.25 38.25 38.25 38.25
77 38.25 38.25 38.25 38.25
78 38.25 38.25 38.25 38.25
79 38.25 38.25 38.25 38.25
80 38.25 38.25 38.25 38.25
</TABLE>
D-3
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 35, non-smoker
purchases a $100,000 Policy. In this example the Guideline Annual Premium
("GAP") equals $1,118.22. His maximum surrender charge is calculated as follows:
(a) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge $909.95
(49% X 1.660714 GAPs)
-----------
TOTAL $1,759.95
Maximum Surrender Charge per Table on Page 84 (16.60 X 100) $1,660.00
During the first two Policy years after the Date of Issue, the actual surrender
charge is the smaller of the maximum surrender charge and the following sum:
(a) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(b) Deferred Sales Charge Varies
(not to exceed 29% of Premiums received,
up to one GAP, plus 9% of Premiums
received in excess of one GAP, but
less than the maximum number of GAPs
subject to the deferred sales charge)
--------------------
Sum of (a) and (b)
The maximum surrender charge is $1,660. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
Example 1:
Assume the Policyowner surrenders the Policy in the tenth Policy month, having
paid total premiums of $900. The actual surrender charge would be $1,111.
Example 2:
Assume the Policyowner surrenders the Policy in the 120th Policy month. After
the 40th Policy month, the maximum surrender charge decreases by 0.5% per month
($8.30 per month in this example.) In this example, the maximum surrender charge
would be $996.
D-4
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Policy was first offered to the public in 1994. The Company, however, may
advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I(A) and I(B)), and based on the periods that the Underlying Funds have
been in existence (Tables II(A) and II(B)). The results for any period prior to
the Policy being offered will be calculated as if the Policy had been offered
during that period of time, with all charges assumed to be those applicable to
the Sub-Accounts, the Underlying Funds, and (in Table I(A) and II(A)) under a
"representative" Policy that is surrendered at the end of the applicable period.
FOR MORE INFORMATION ON CHARGES UNDER THE POLICY, SEE CHARGES AND DEDUCTIONS.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1999. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional literature,
to:
- - Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow Jones
Industrial Average ("DJIA"), Shearson, Lehman Aggregate Bond Index, or other
unmanaged indices so that investors may compare results with those of a group
of unmanaged securities widely regarded by investors as representative of the
securities markets in general (unmanaged indices may assume the reinvestment
of dividends, but generally do not reflect deductions for administrative and
management costs and expenses); or
- - other groups of variable life separate accounts or other investment products
tracked by Lipper Inc., a widely used independent research firm which ranks
mutual funds and other investment products by overall performance, investment
objectives and assets, or tracked by other services, companies, publications
or persons, such as Morningstar, Inc., who rank such investment products on
overall performance or other criteria; or
- - the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues,
and do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
The Company may provide information on various topics of interest to
Policyowners and prospective Policyowners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar-cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (non-smoker) Premium Class, that the Face Amount of
the Policy is $250,000, that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year,
that ALL premiums were allocated to EACH Sub-Account individually, and that
there was a full surrender of the Policy at the end of the applicable period.
<TABLE>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -80.13% 10.44% 7.90%
Select Capital Appreciation Fund -92.10% N/A 6.31%
Select Value Opportunity Fund -100.00% -1.09% -1.79%
Select Emerging Markets Fund -55.69% N/A -27.76%
T. Rowe Price International Stock Portfolio -84.93% N/A -1.49%
Fidelity VIP Overseas Portfolio -76.55% 3.49% 3.16%
Select International Equity Fund -86.38% 4.90% 3.58%
DGPF International Equity Series -100.00% -1.47% -0.55%
Fidelity VIP Growth Portfolio -81.23% 17.66% 15.41%
Select Growth Fund -88.10% 16.93% 14.70%
Select Strategic Growth Fund -100.00% N/A -67.84%
Core Equity Fund -88.53% 12.61% 11.50%
Equity Index Fund -96.55% 15.48% 14.85%
Fidelity VIP Equity-Income Portfolio -100.00% 4.95% 6.48%
Select Growth and Income Fund -98.33% 8.55% 8.43%
Fidelity VIP II Asset Manager Portfolio -100.00% 1.42% 1.32%
Fidelity VIP High Income Portfolio -100.00% 4.36% 3.52%
Select Investment Grade Income Fund -100.00% -8.72% -7.04%
Government Bond Fund -100.00% -10.19% -8.01%
Money Market Fund -100.00% -11.18% -8.72%
</TABLE>
The inception dates for the Sub-Accounts are: 4/6/94 for Select Aggressive
Growth, Select Value Opportunity, Fidelity VIP Overseas, DGPF International
Equity, Fidelity VIP Growth, Fidelity VIP Equity-Income, and Fidelity VIP High
Income; 4/7/94 for Core Equity; 4/10/94 for Select Growth; 4/18/94 for Select
Growth and Income; 4/20/94 for Select Investment Grade Income and Equity Index;
5/3/94 for Select International Equity; 5/4/94 for Money Market; 5/10/94 for
Government Bond; 5/11/94 for Fidelity VIP II Asset Manager; 4/30/95 for Select
Capital Appreciation; 6/26/95 for T. Rowe Price International Stock; and 8/27/98
for Select Emerging Markets and Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS, AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT
MONTHLY CHARGES UNDER THE POLICY OR SURRENDER CHARGES. It is assumed that an
annual premium payment of $3,000 (approximately one Guideline Annual Premium)
was made at the beginning of each Policy year and that ALL premiums were
allocated to EACH Sub-Account individually.
<TABLE>
10 YEARS
OR LIFE
OF
ONE-YEAR TOTAL 5 SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 37.55% 22.26% 17.92%
Select Capital Appreciation Fund 24.36% N/A 20.37%
Select Value Opportunity Fund -5.46% 12.54% 9.72%
Select Emerging Markets Fund 64.40% N/A 65.85%
T. Rowe Price International Stock Portfolio 32.26% N/A 14.74%
Fidelity VIP Overseas Portfolio 41.49% 16.34% 13.86%
Select International Equity Fund 30.66% 17.52% 14.44%
DGPF International Equity Series 14.83% 12.23% 10.75%
Fidelity VIP Growth Portfolio 36.34% 28.60% 24.54%
Select Growth Fund 28.77% 27.95% 23.94%
Select Strategic Growth Fund 15.13% N/A 25.72%
Core Equity Fund 28.30% 24.15% 21.08%
Equity Index Fund 19.45% 26.67% 24.15%
Fidelity VIP Equity-Income Portfolio 5.48% 17.57% 16.70%
Select Growth and Income Fund 17.48% 20.63% 18.48%
Fidelity VIP II Asset Manager Portfolio 10.20% 14.61% 12.60%
Fidelity VIP High Income Portfolio 7.29% 9.89% 8.30%
Select Investment Grade Income Fund -1.76% 6.44% 5.59%
Government Bond Fund -0.57% 5.30% 4.99%
Money Market Fund 4.34% 4.54% 4.38%
</TABLE>
The inception dates for the Sub-Accounts are: 4/6/94 for Select Aggressive
Growth, Select Value Opportunity, Fidelity VIP Overseas, DGPF International
Equity, Fidelity VIP Growth, Fidelity VIP Equity-Income, and Fidelity VIP High
Income; 4/7/94 for Core Equity; 4/10/94 for Select Growth; 4/18/94 for Select
Growth and Income; 4/20/94 for Select Investment Grade Income and Equity Index;
5/3/94 for Select International Equity; 5/4/94 for Money Market; 5/10/94 for
Government Bond; 5/11/94 for Fidelity VIP II Asset Manager; 4/30/95 for Select
Capital Appreciation; 6/26/95 for T. Rowe Price International Stock; and 8/27/98
for Select Emerging Markets and Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-3
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (non-smoker) Premium Class, that the Face Amount of
the Policy is $250,000, that an annual premium payment of $3,000 (approximately
one Guideline Annual Premium) was made at the beginning of each Policy year,
that ALL premiums were allocated to EACH Sub-Account individually, and that
there was a full surrender of the Policy at the end of the applicable period.
<TABLE>
10 YEARS
OR LIFE
ONE-YEAR TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -80.13% 10.44% 13.48%
Select Capital Appreciation Fund -92.10% N/A 6.31%
Select Value Opportunity Fund -100.00% -1.09% 1.70%
Select Emerging Markets Fund -55.69% N/A -47.33%
T. Rowe Price International Stock Portfolio -84.93% 0.78% 1.38%
Fidelity VIP Overseas Portfolio -76.55% 3.49% 5.56%
Select International Equity Fund -86.38% 4.90% 3.58%
DGPF International Equity Series -100.00% -1.47% 3.30%
Fidelity VIP Growth Portfolio -81.23% 17.66% 14.74%
Select Growth Fund -88.10% 16.93% 13.00%
Select Strategic Growth Fund -100.00% N/A -56.81%
Core Equity Fund -88.53% 12.61% 11.95%
Equity Index Fund -96.55% 15.48% 15.02%
Fidelity VIP Equity-Income Portfolio -100.00% 4.95% 9.01%
Select Growth and Income Fund -98.33% 8.55% 7.88%
Fidelity VIP II Asset Manager Portfolio -100.00% 1.42% 7.43%
Fidelity VIP High Income Portfolio -100.00% -4.36% 6.66%
Select Investment Grade Income Fund -100.00% -8.72% 1.40%
Government Bond Fund -100.00% -10.19% -1.84%
Money Market Fund -100.00% -11.18% -1.41%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select Investment Grade Income and Money Market; 9/19/85 for Fidelity VIP High
Income; 10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth; 1/28/87
for Fidelity VIP Overseas; 9/6/89 for Fidelity VIP II Asset Manager; 9/28/90 for
Equity Index; 8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth,
Select Growth, and Select Growth and Income; 10/29/92 for DGPF International
Equity; 4/30/93 for Select Value Opportunity; 5/2/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 3/31/94 for T. Rowe Price
International Stock; and 2/20/98 for Select Emerging Markets and Select
Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-4
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE POLICY OR SURRENDER CHARGES. It is assumed
that an annual premium payment of $3,000 (approximately one Guideline Annual
Premium) was made at the beginning of each Policy year and that ALL premiums
were allocated to EACH Sub-Account individually.
<TABLE>
10 YEARS
ONE-YEAR TOTAL 5 OR LIFE OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 37.55% 22.26% 19.84%
Select Capital Appreciation Fund 24.36% N/A 20.37%
Select Value Opportunity Fund -5.46% 12.54% 10.52%
Select Emerging Markets Fund 64.40% N/A 14.19%
T. Rowe Price International Stock Portfolio 32.26% 14.08% 12.31%
Fidelity VIP Overseas Portfolio 41.49% 16.34% 10.31%
Select International Equity Fund 30.66% 17.52% 14.43%
DGPF International Equity Series 14.83% 12.23% 11.03%
Fidelity VIP Growth Portfolio 36.34% 28.60% 18.73%
Select Growth Fund 28.77% 27.95% 19.40%
Select Strategic Growth Fund 15.13% N/A 5.94%
Core Equity Fund 28.30% 24.15% 16.14%
Equity Index Fund 19.45% 26.67% 19.46%
Fidelity VIP Equity-Income Portfolio 5.48% 17.57% 13.43%
Select Growth and Income Fund 17.48% 20.63% 14.80%
Fidelity VIP II Asset Manager Portfolio 10.20% 14.61% 12.00%
Fidelity VIP High Income Portfolio 7.29% 9.89% 11.30%
Select Investment Grade Income Fund -1.76% 6.44% 6.61%
Government Bond Fund -0.57% 5.30% 5.18%
Money Market Fund 4.34% 4.54% 4.17%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select Investment Grade Income and Money Market; 9/19/85 for Fidelity VIP High
Income; 10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth; 1/28/87
for Fidelity VIP Overseas; 9/6/89 for Fidelity VIP II Asset Manager; 9/28/90 for
Equity Index; 8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth,
Select Growth, and Select Growth and Income; 10/29/92 for DGPF International
Equity; 4/30/93 for Select Value Opportunity; 5/2/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 3/31/94 for T. Rowe Price
International Stock; and 2/20/98 for Select Emerging Markets and Select
Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-5
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
Payment related to exiting
reinsurance pools................. -- (30.3) --
Loss from cession of disability
income business................... -- -- 53.9
Payment related to cession of
disability income business........ -- -- (207.0)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
the accounts of its wholly-owned life insurance subsidiary Allmerica Financial
Life Insurance and Annuity Company ("AFLIAC"), its non-insurance subsidiaries
(principally brokerage and investment advisory services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). The acquisition has been recognized as a purchase. The
minority interest acquired totaled $158.5 million. A total of $40.8 million
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for Citizens. Minority interest also includes
an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block ("the Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual deferred annuity contracts and supplementary contracts not involving
life contingencies which were in force as of FAFLIC's demutualization on
October 16, 1995; such policies constitute the "Closed Block Business". The
purpose of the Closed Block is to protect the policy dividend expectations of
such FAFLIC dividend paying policies and contracts. Unless the Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance Commissioner") consents to
an earlier termination, the Closed Block will continue to be in effect until the
date none of the Closed Block policies are in force. FAFLIC allocated to the
Closed Block assets in an amount that is expected to produce cash flows which,
together with future revenues from the Closed Block Business, are reasonably
sufficient to support the Closed Block Business, including provision for payment
of policy benefits, certain future expenses and taxes and for continuation of
policyholder dividend scales payable in 1994 so long as the experience
underlying such dividend scales continues. The Company expects that the factors
underlying such experience will fluctuate in the future and policyholder
dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at the estimated fair value less costs of disposal. Depreciation is not
recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge the
foreign currency exchange risk associated with investment securities are
accounted for using a combination of the fair value method and accrual method,
with changes in fair value reported in unrealized gains and losses in equity
consistent with the underlying hedged security, and the net payment or receipt
on the swaps reported in net investment income. Foreign currency swap contracts
used to hedge foreign currency exchange risk associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. Futures contracts used to hedge interest rate risk are
accounted for using the deferral method, with gains and losses deferred in
unrealized gains and losses in equity and recognized in earnings in conjunction
with the earnings recognition of the underlying hedged item. Default swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value, if any, reported in realized
investment gains and losses in earnings. Premium paid to the Company on default
swap contracts is reported in net investment income in earnings. Other swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value reported in realized investment gains
and
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses in earnings. Any ineffective swaps or futures hedges are recognized
currently in realized investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products are deferred and amortized, generally in proportion to the
ratio of annual revenue to the estimated total revenues over the contract
periods based upon the same assumptions used in estimating the liability for
future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6.0%
for life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life, variable universal life and variable annuities include deposits
received from customers and investment earnings on their fund balances, less
administrative charges. Universal life fund balances are also assessed mortality
and surrender charges. Liabilities for variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
Premiums for property and casualty insurance are reported as earned on a
pro-rata basis over the contract period. The unexpired portion of these premiums
is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts ("GICs"),
deposit administration funds and immediate participation guarantee funds and
consist of deposits received from customers and investment earnings on their
fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty insurance premiums are
recognized as revenue over the related contract periods. Benefits, losses and
related expenses are matched with premiums, resulting in their recognition over
the lives of the contracts. This matching is accomplished through the provision
for future benefits, estimated and unpaid losses and amortization of deferred
policy acquisition costs. Revenues for investment-related products consist of
net investment income and contract charges assessed against the fund values.
Related benefit expenses include annuity benefit claims in excess of a
guaranteed minimum fund value, and net investment income credited to the fund
values after deduction for investment and risk charges. Revenues for universal
life products consist of net investment income, with mortality, administration
and surrender charges assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Certain policy charges
that represent compensation for services
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be provided in future periods are deferred and amortized over the period
benefited using the same assumptions used to amortize capitalized acquisition
costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life company taxable income. Prior to
the merger on July 16, 1997, Allmerica P&C and its subsidiaries filed a separate
United States federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from loss and LAE
reserves, policy reserves, policy acquisition expenses, and unrealized
appreciation or depreciation on investments.
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted Statement No. 130
for the first quarter of 1998, which resulted primarily in reporting unrealized
gains and losses on investments in debt and equity securities in comprehensive
income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
On December 3, 1998 Citizens Acquisition Corporation, a wholly-owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly-owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens Corporation prior to December 3, 1998. The unaudited pro forma
information below presents consolidated results of operation as if the
acquisition had occurred at the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty field support activities from
fourteen regional branches into three hub locations. As a result of the
Company's restructuring initiative, it recognized a pretax loss of $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, related to this restructuring
initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company's assumed stop loss business, small group
managed care pools, long-term disability and long-term care pools, student
accident and special risk business. The agreement is consistent with
management's decision to exit this line of business, which the Company expects
to run-off over the next three years. As a result of this transaction, the
Company recognized a $25.3 million pre-tax loss in the third quarter of 1998.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of the
universal life and variable universal life blocks of business. The agreement did
not have a material effect on its results of operations or financial position.
In 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. The 1998 transaction consisted of $124.0
million of securities and $1.0 million of cash. The 1997 transaction consisted
of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly-owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly. The merger has been recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has been allocated to the minority interest in the assets and liabilities based
on estimates of their fair values. The minority interest acquired totaled $703.5
million. A total of $90.6 million representing the excess of the purchase price
over the fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
6. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities.................. $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities....................... $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C.............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................... (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year............................... $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans are diversified by property type and location. Real
estate investments have been obtained primarily through foreclosure. Mortgage
loans are collateralized by the related properties and generally are no more
than 75% of the property's value at the time the original loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. Depreciation is not
recorded on these assets while they are held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
- -- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans.............................................. $19.6 $ 2.5 $ 1.4 $20.7
Real estate................................................. 14.9 6.0 20.9 --
----- ----- ----- -----
Total....................................................... $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $20.9 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs") and other funding agreements. The
Company is exposed to interest rate risk from the time of sale of the GIC until
the receipt of the deposit and purchase of the underlying asset to back the
liability. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
The notional amount of futures contracts outstanding was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not future cash
requirements, as the Company generally settles open positions prior to maturity.
The maturity of all futures contracts outstanding is less than one year. The
fair value of futures contracts outstanding was $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities payable in foreign currencies, at current exchange
rates, are exchanged for the equivalent payment in U.S dollars translated at a
specific currency exchange rate. The primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. The Company's maximum
exposure to counterparty credit risk is the difference between the foreign
currency exchange rate, as agreed upon in the swap contract, and the foreign
currency spot rate on the date of the exchange, as indicated by the fair value
of the contract. The fair values of the foreign currency swap contracts
outstanding were $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. The Company does not
require collateral or other security to support financial instruments with
credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1999, 1998 and 1997. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. As with foreign currency swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, respectively.
Changes in the fair value of contracts are reported as an unrealized gain or
loss, consistent with the underlying hedged security. Any gain or loss on the
termination of interest rate swap contracts accounted for as hedges are deferred
and recognized with the gain or loss on the hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. Under the insurance portfolio-linked swap
contracts, the Company agrees to exchange cash flows according to the
performance of a specified underwriter's portfolio of insurance business. As
with interest rate swap contracts, the primary risk associated with insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, the Company
assumes the default risk of a specific high credit quality issuer in exchange
for a stated annual premium. In the case of default, the Company will pay the
counterparty par value for a pre-determined security of the issuer. The primary
risk associated with these transactions is the default risk of the underlying
companies. The Company regularly assesses the financial strength of its
counterparties and the underlying companies in default swap contracts, and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. At December 31, 1998, there was one mortgage loan
on non-accrual status which had an outstanding principal balance of $4.3
million. This loan was restructured and fully impaired. There were no fixed
maturities on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ------ ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
F-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1999, there was no commercial
paper outstanding.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory federal income tax rate. The
sources of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The IRS has also examined the former Allmerica P&C consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the federal income tax returns for 1992,
1993 and 1994 for the FAFLIC/AFLIAC consolidated group. Also, certain
adjustments proposed by the IRS with respect to FAFLIC/AFLIAC's federal income
tax returns for 1982 and 1983 remain unresolved. If upheld, these adjustments
would result in additional payments; however, the Company will vigorously defend
its position with respect to these adjustments. In the Company's opinion,
adequate tax liabilities have been established for all years. However, the
amount of these tax liabilities could be revised in the near term if estimates
of the Company's ultimate liability are revised.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1999, 1998 and 1997 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
The actuarial present value of the projected benefit obligations was determined
using assumed rates of increase in future compensation levels ranging from 5.0%
to 5.5%. Plan assets are invested primarily in various separate accounts and the
general account of FAFLIC. Plan assets also include 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies were
merged with the existing benefit plans of FAFLIC. The merger of benefit plans
resulted in a $5.9 million change of interest adjustment to additional paid-in
capital during 1998. The change of interest adjustment arose from FAFLIC's
forgiveness of certain Allmerica P&C benefit plan liabilities attributable to
Allmerica P&C's minority interest.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective
January 1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments and to restrict eligibility to current employees. The
medical plans have varying copayments and deductibles, depending on the plan.
These plans are unfunded.
The plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 million. Conversely, decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. In addition, the actuarial present value of the accumulated
postretirement benefit obligation was determined using an assumed rate of
increase in future compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the postretirement medical and death
benefits plans previously provided by the affiliated Companies were merged with
the existing benefit plans of FAFLIC. The merger of benefit plans resulted in a
$3.8 million change of interest adjustment to additional paid-in capital during
1998. The change of interest adjustment arose from FAFLIC's forgiveness of
certain Allmerica P&C benefit plan liabilities attributable to Allmerica P&C's
minority interest.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or not in excess of the aforementioned threshold, from a source other
than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. No dividends were declared by AFLIAC to
FAFLIC during 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented consistent with the way
results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. A summary of
the Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The Asset Accumulation group includes two segments: Allmerica Financial Services
and Allmerica Asset Management. The Allmerica Financial Services segment
includes variable annuities, variable universal life and traditional life
insurance products distributed via retail channels as well as group retirement
products, such as defined benefit and 401(k) plans and tax-sheltered annuities
distributed to institutions. Through its Allmerica Asset Management segment, the
Company offers its customers the option of investing in GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. This segment is also a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and pension
plans. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, extraordinary items, the
cumulative effect of accounting changes and certain other items which management
believes are not indicative of overall operating trends. While these items may
be significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 million thereafter. It is
expected that, in the normal course of business, leases that expire will be
renewed or replaced by leases on other property and equipment; thus, it is
anticipated that future minimum lease commitments will not be less than the
amounts shown for 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of Statement of Financial
Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short
Duration and Long Duration Contracts.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, the
Company is subject to concentration of risk with respect to reinsurance ceded to
various residual market mechanisms. As a condition to the ability to conduct
certain business in various states, the Company is required to participate in
various residual market mechanisms and pooling arrangements which provide
various insurance coverages to individuals or other entities that are otherwise
unable to purchase such coverage voluntarily provided by private insurers. These
market mechanisms and pooling arrangements include the Massachusetts
Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers' Compensation
Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association
("MCCA"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
Adjustment for cession of disability income insurance....... -- -- (38.6)
Adjustment for revision of universal and variable universal
life insurance mortality assumptions...................... -- -- 50.8
-------- -------- --------
Balance at end of year...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
19. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Due to the nature of the business written by the Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company may be
required to defend such claims. The Company estimated its ultimate liability for
these claims based upon currently known facts, reasonable assumptions where the
facts are not known,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. The
Company believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims are
adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. FAFLIC recognized a $31.0 million pre-tax expense during
the third quarter of 1998 related to this litigation. Although the Company
believes that this expense reflects appropriate recognition of its obligation
under the settlement, this estimate assumes the availability of insurance
coverage for certain claims, and the estimate may be revised based on the amount
of reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
22. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, postretirement benefit
costs are based on different assumptions and reflect a different method of
adoption, life insurance reserves are based on different assumptions and income
tax expense reflects only taxes paid or currently payable. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Policyowners of the VEL II Account of First Allmerica Financial Life
Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the VEL II Account of First Allmerica Financial Life Insurance
Company at December 31, 1999, the results of each of their operations and the
changes in each of their net assets for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of First Allmerica Financial
Life Insurance Company; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY EQUITY GOVERNMENT AGGRESSIVE SELECT
GROWTH GRADE INCOME MARKET INDEX BOND GROWTH GROWTH
---------- ------------- ------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust..... $3,230,628 $ 453,814 $1,257,488 $3,981,588 $ 175,468 $4,736,907 $6,290,002
Investments in shares of Fidelity
Variable Insurance Products
Funds (VIP).................... -- -- -- -- -- -- --
Investment in shares of T. Rowe
Price International
Series, Inc.................... -- -- -- -- -- -- --
Investment in shares of Delaware
Group Premium Fund............. -- -- -- -- -- -- --
---------- --------- ---------- ---------- --------- ---------- ----------
Total assets................... 3,230,628 453,814 1,257,488 3,981,588 175,468 4,736,907 6,290,002
LIABILITIES: -- -- -- -- -- -- --
---------- --------- ---------- ---------- --------- ---------- ----------
Net assets..................... $3,230,628 $ 453,814 $1,257,488 $3,981,588 $ 175,468 $4,736,907 $6,290,002
========== ========= ========== ========== ========= ========== ==========
Net asset distribution by
category:
Variable life policies......... $3,230,628 $ 453,814 $1,257,488 $3,981,588 $ 175,468 $4,736,907 $6,290,002
========== ========= ========== ========== ========= ========== ==========
Units outstanding, December 31,
1999........................... 1,078,876 332,801 986,619 1,160,512 133,308 1,839,966 1,840,686
Net asset value per unit,
December 31, 1999.............. $ 2.994440 $1.363620 $ 1.274543 $ 3.430889 $1.316260 $2.574454 $ 3.417205
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
AND INCOME OPPORTUNITY EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust..... $2,005,150 $1,984,436 $2,020,998
Investments in shares of Fidelity
Variable Insurance Products
Funds (VIP).................... -- -- --
Investment in shares of T. Rowe
Price International
Series, Inc.................... -- -- --
Investment in shares of Delaware
Group Premium Fund............. -- -- --
---------- ---------- ----------
Total assets................... 2,005,150 1,984,436 2,020,998
LIABILITIES: -- -- --
---------- ---------- ----------
Net assets..................... $2,005,150 $1,984,436 $2,020,998
========== ========== ==========
Net asset distribution by
category:
Variable life policies......... $2,005,150 $1,984,436 $2,020,998
========== ========== ==========
Units outstanding, December 31,
1999........................... 762,099 1,165,617 941,497
Net asset value per unit,
December 31, 1999.............. $ 2.631088 $ 1.702477 $ 2.146580
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
VEL II ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT FIDELITY FIDELITY
CAPITAL EMERGING STRATEGIC FIDELITY VIP FIDELITY VIP VIP VIP
APPRECIATION MARKETS GROWTH HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS
------------ ---------- ---------- ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust..... $1,616,205 $ 155,527 $ 6,140 $ -- $ -- $ -- $ --
Investments in shares of Fidelity
Variable Insurance Products
Funds (VIP).................... -- -- -- 1,719,051 4,039,550 6,539,555 1,540,259
Investment in shares of T. Rowe
Price International
Series, Inc.................... -- -- -- -- -- -- --
Investment in shares of Delaware
Group Premium Fund............. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets................... 1,616,205 155,527 6,140 1,719,051 4,039,550 6,539,555 1,540,259
LIABILITIES: -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net assets..................... $1,616,205 $ 155,527 $ 6,140 $1,719,051 $4,039,550 $6,539,555 $1,540,259
========== ========== ========== ========== ========== ========== ==========
Net asset distribution by
category:
Variable life policies......... $1,616,205 $ 155,527 $ 6,140 $1,719,051 $4,039,550 $6,539,555 $1,540,259
========== ========== ========== ========== ========== ========== ==========
Units outstanding, December 31,
1999........................... 679,228 78,751 4,513 1,087,900 1,665,844 1,856,625 731,331
Net asset value per unit,
December 31, 1999.............. $ 2.379473 $ 1.974920 $ 1.360626 $ 1.580156 $ 2.424927 $ 3.522281 $ 2.106103
<CAPTION>
T. ROWE PRICE DGPF
FIDELITY VIP II INTERNATIONAL INTERNATIONAL
ASSET MANAGER STOCK EQUITY
--------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust..... $ -- $ -- $ --
Investments in shares of Fidelity
Variable Insurance Products
Funds (VIP).................... 868,550 -- --
Investment in shares of T. Rowe
Price International
Series, Inc.................... -- 6,762,903 --
Investment in shares of Delaware
Group Premium Fund............. -- -- 1,145,492
---------- ---------- ----------
Total assets................... 868,550 6,762,903 1,145,492
LIABILITIES: -- -- --
---------- ---------- ----------
Net assets..................... $ 868,550 $6,762,903 $1,145,492
========== ========== ==========
Net asset distribution by
category:
Variable life policies......... $ 868,550 $6,762,903 $1,145,492
========== ========== ==========
Units outstanding, December 31,
1999........................... 444,601 3,634,779 637,825
Net asset value per unit,
December 31, 1999.............. $ 1.953551 $ 1.860609 $ 1.795936
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME MONEY MARKET
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------------ ---------------------------- ----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 16,572 $ 18,776 $ 13,601 $ 32,188 $28,663 $18,772 $163,307 $95,186 $52,306
-------- -------- -------- -------- ------- ------- -------- ------- -------
EXPENSES:
Mortality and expense risk
fees........................... 16,870 10,569 5,407 3,366 2,984 1,605 21,183 11,147 6,125
Administrative expense fees...... 3,893 2,936 1,502 777 830 446 4,889 3,096 1,701
-------- -------- -------- -------- ------- ------- -------- ------- -------
Total expenses................. 20,763 13,505 6,909 4,143 3,814 2,051 26,072 14,243 7,826
-------- -------- -------- -------- ------- ------- -------- ------- -------
Net investment income (loss)... (4,191) 5,271 6,692 28,045 24,849 16,721 137,235 80,943 44,480
-------- -------- -------- -------- ------- ------- -------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 237,199 17,705 191,234 413 -- -- -- -- --
Net realized gain (loss) from
sales of investments........... 61,516 12,511 10,534 (3,560) 2,137 1,016 -- -- --
-------- -------- -------- -------- ------- ------- -------- ------- -------
Net realized gain (loss)....... 298,715 30,216 201,768 (3,147) 2,137 1,016 -- -- --
Net unrealized gain (loss)....... 390,796 241,984 (42,649) (34,245) 5,494 4,203 -- -- --
-------- -------- -------- -------- ------- ------- -------- ------- -------
Net realized and unrealized
gain (loss).................. 689,511 272,200 159,119 (37,392) 7,631 5,219 -- -- --
-------- -------- -------- -------- ------- ------- -------- ------- -------
Net increase (decrease) in net
assets from operations....... $685,320 $277,471 $165,811 $ (9,347) $32,480 $21,940 $137,235 $80,943 $44,480
======== ======== ======== ======== ======= ======= ======== ======= =======
<CAPTION>
EQUITY INDEX
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 30,446 $ 22,145 $ 10,943
-------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 20,866 11,321 4,839
Administrative expense fees...... 4,815 3,145 1,344
-------- -------- --------
Total expenses................. 25,681 14,466 6,183
-------- -------- --------
Net investment income (loss)... 4,765 7,679 4,760
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 4,851 60,046 31,998
Net realized gain (loss) from
sales of investments........... 113,653 52,058 12,757
-------- -------- --------
Net realized gain (loss)....... 118,504 112,104 44,755
Net unrealized gain (loss)....... 467,603 335,828 138,917
-------- -------- --------
Net realized and unrealized
gain (loss).................. 586,107 447,932 183,672
-------- -------- --------
Net increase (decrease) in net
assets from operations....... $590,872 $455,611 $188,432
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 8,396 $ 9,107 $13,395 $ -- $ -- $ --
------- ------- ------- ---------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 949 1,116 1,437 23,255 16,109 9,966
Administrative expense fees...... 219 310 400 5,366 4,475 2,768
------- ------- ------- ---------- -------- --------
Total expenses................. 1,168 1,426 1,837 28,621 20,584 12,734
------- ------- ------- ---------- -------- --------
Net investment income (loss)... 7,228 7,681 11,558 (28,621) (20,584) (12,734)
------- ------- ------- ---------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- -- -- 161,459
Net realized gain (loss) from
sales of investments........... 457 5,852 1,338 85,004 13,063 20,458
------- ------- ------- ---------- -------- --------
Net realized gain (loss)....... 457 5,852 1,338 85,004 13,063 181,917
Net unrealized gain (loss)....... (8,093) (2,809) 1,652 1,204,487 252,556 110,749
------- ------- ------- ---------- -------- --------
Net realized and unrealized
gain (loss).................. (7,636) 3,043 2,990 1,289,491 265,619 292,666
------- ------- ------- ---------- -------- --------
Net increase (decrease) in net
assets from operations....... $ (408) $10,724 $14,548 $1,260,870 $245,035 $279,932
======= ======= ======= ========== ======== ========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 2,394 $ 2,373 $ 4,885 $ 18,598 $ 14,245 $ 8,608
---------- -------- -------- -------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 30,205 16,405 6,152 10,766 6,894 3,860
Administrative expense fees...... 6,970 4,557 1,708 2,485 1,916 1,072
---------- -------- -------- -------- -------- --------
Total expenses................. 37,175 20,962 7,860 13,251 8,810 4,932
---------- -------- -------- -------- -------- --------
Net investment income (loss)... (34,781) (18,589) (2,975) 5,347 5,435 3,676
---------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 152,141 26,511 84,825 124,294 4,035 74,145
Net realized gain (loss) from
sales of investments........... 234,216 96,579 7,827 12,676 10,257 9,955
---------- -------- -------- -------- -------- --------
Net realized gain (loss)....... 386,357 123,090 92,652 136,970 14,292 84,100
Net unrealized gain (loss)....... 961,880 702,679 178,767 128,030 145,405 27,327
---------- -------- -------- -------- -------- --------
Net realized and unrealized
gain (loss).................. 1,348,237 825,769 271,419 265,000 159,697 111,427
---------- -------- -------- -------- -------- --------
Net increase (decrease) in net
assets from operations....... $1,313,456 $807,180 $268,444 $270,347 $165,132 $115,103
========== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ --------------------------------
1999 1998 1997 1999 1998 1997
--------- ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 11 $15,182 $ 6,715 $ -- $ 28,746 $ 21,935
--------- ------- -------- ---------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 12,234 9,580 5,335 16,110 10,523 4,837
Administrative expense fees...... 2,823 2,661 1,482 3,718 2,923 1,343
--------- ------- -------- ---------- -------- --------
Total expenses................. 15,057 12,241 6,817 19,828 13,446 6,180
--------- ------- -------- ---------- -------- --------
Net investment income (loss)... (15,046) 2,941 (102) (19,828) 15,300 15,755
--------- ------- -------- ---------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 108,896 5,501 161,396 -- -- 30,519
Net realized gain (loss) from
sales of investments........... (9,620) 3,558 9,659 963,452 488,196 7,247
--------- ------- -------- ---------- -------- --------
Net realized gain (loss)....... 99,276 9,059 171,055 963,452 488,196 37,766
Net unrealized gain (loss)....... (182,782) 50,238 13,106 235,229 (37,376) (30,852)
--------- ------- -------- ---------- -------- --------
Net realized and unrealized
gain (loss).................. (83,506) 59,297 184,161 1,198,681 450,820 6,914
--------- ------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations....... $ (98,552) $62,238 $184,059 $1,178,853 $466,120 $ 22,669
========= ======= ======== ========== ======== ========
<CAPTION>
SELECT EMERGING MARKETS
SELECT CAPITAL APPRECIATION
FOR THE YEAR ENDED FOR THE YEAR FOR THE
DECEMBER 31, ENDED PERIOD
------------------------------ DECEMBER 31, 8/28/98* TO
1999 1998 1997 1999 12/31/98
-------- -------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ -- $ -- $ 194 $ 7
-------- -------- -------- ------- ----
EXPENSES:
Mortality and expense risk
fees........................... 8,599 6,409 4,815 181 8
Administrative expense fees...... 1,985 1,780 1,338 42 2
-------- -------- -------- ------- ----
Total expenses................. 10,584 8,189 6,153 223 10
-------- -------- -------- ------- ----
Net investment income (loss)... (10,584) (8,189) (6,153) (29) (3)
-------- -------- -------- ------- ----
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 2,024 181,239 -- -- --
Net realized gain (loss) from
sales of investments........... 25,568 63,780 9,538 3,962 6
-------- -------- -------- ------- ----
Net realized gain (loss)....... 27,592 245,019 9,538 3,962 6
Net unrealized gain (loss)....... 301,462 (94,363) 124,106 17,411 636
-------- -------- -------- ------- ----
Net realized and unrealized
gain (loss).................. 329,054 150,656 133,644 21,373 642
-------- -------- -------- ------- ----
Net increase (decrease) in net
assets from operations....... $318,470 $142,467 $127,491 $21,344 $639
======== ======== ======== ======= ====
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC GROWTH
FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
FOR THE YEAR FOR THE FOR THE YEAR ENDED FOR THE YEAR ENDED
ENDED PERIOD DECEMBER 31, DECEMBER 31,
DECEMBER 31, 8/28/98* TO ------------------------------- ------------------------------
1999 12/31/98 1999 1998 1997 1999 1998 1997
------------- ----------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 17 $ 9 $138,955 $ 77,091 $ 38,428 $ 52,286 $ 34,125 $ 23,872
---- ---- -------- --------- -------- -------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 32 7 13,007 9,036 4,525 25,512 18,447 11,759
Administrative expense fees...... 7 2 3,001 2,511 1,257 5,888 5,124 3,267
---- ---- -------- --------- -------- -------- -------- --------
Total expenses................. 39 9 16,008 11,547 5,782 31,400 23,571 15,026
---- ---- -------- --------- -------- -------- -------- --------
Net investment income (loss)... (22) -- 122,947 65,544 32,646 20,886 10,554 8,846
---- ---- -------- --------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- 5,195 48,985 4,749 115,579 121,445 120,025
Net realized gain (loss) from
sales of investments........... 29 4 112,463 (4,754) 3,431 117,938 98,536 164,891
---- ---- -------- --------- -------- -------- -------- --------
Net realized gain (loss)....... 29 4 117,658 44,231 8,180 233,517 219,981 284,916
Net unrealized gain (loss)....... 746 584 9,877 (111,343) 70,794 (59,321) 70,169 151,595
---- ---- -------- --------- -------- -------- -------- --------
Net realized and unrealized
gain (loss).................. 775 588 127,535 (67,112) 78,974 174,196 290,150 436,511
---- ---- -------- --------- -------- -------- -------- --------
Net increase (decrease) in net
assets from operations....... $753 $588 $250,482 $ (1,568) $111,620 $195,082 $300,704 $445,357
==== ==== ======== ========= ======== ======== ======== ========
<CAPTION>
FIDELITY VIP GROWTH
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 7,036 $ 12,072 $ 9,562
---------- ---------- --------
EXPENSES:
Mortality and expense risk
fees........................... 32,316 18,473 11,865
Administrative expense fees...... 7,457 5,132 3,296
---------- ---------- --------
Total expenses................. 39,773 23,605 15,161
---------- ---------- --------
Net investment income (loss)... (32,737) (11,533) (5,599)
---------- ---------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 442,407 315,781 42,797
Net realized gain (loss) from
sales of investments........... 211,976 27,666 39,459
---------- ---------- --------
Net realized gain (loss)....... 654,383 343,447 82,256
Net unrealized gain (loss)....... 1,009,768 669,786 294,634
---------- ---------- --------
Net realized and unrealized
gain (loss).................. 1,664,151 1,013,233 376,890
---------- ---------- --------
Net increase (decrease) in net
assets from operations....... $1,631,414 $1,001,700 $371,291
========== ========== ========
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
VEL II ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II T. ROWE PRICE
FIDELITY VIP OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------------- --------------------------- -----------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- ------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 15,879 $ 14,437 $ 9,519 $23,781 $17,134 $12,689 $ 3,598 $ 8,096 $ 4,863
-------- -------- ------- ------- ------- ------- -------- ------- --------
EXPENSES:
Mortality and expense risk
fees........................... 9,806 6,236 4,004 5,111 3,818 2,739 8,389 4,096 2,461
Administrative expense fees...... 2,263 1,733 1,112 1,180 1,060 760 1,936 1,138 683
-------- -------- ------- ------- ------- ------- -------- ------- --------
Total expenses................. 12,069 7,969 5,116 6,291 4,878 3,499 10,325 5,234 3,144
-------- -------- ------- ------- ------- ------- -------- ------- --------
Net investment income (loss)... 3,810 6,468 4,403 17,490 12,256 9,190 (6,727) 2,862 1,719
-------- -------- ------- ------- ------- ------- -------- ------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 25,611 42,552 37,788 30,122 51,401 31,831 11,309 2,857 6,889
Net realized gain (loss) from
sales of investments........... 633,821 135,177 14,898 3,046 2,347 2,956 987,896 11,569 3,203
-------- -------- ------- ------- ------- ------- -------- ------- --------
Net realized gain (loss)....... 659,432 177,729 52,686 33,168 53,748 34,787 999,205 14,426 10,092
Net unrealized gain (loss)....... 102,038 (3,736) (1,354) 27,828 16,226 33,391 (38,456) 67,894 (11,884)
-------- -------- ------- ------- ------- ------- -------- ------- --------
Net realized and unrealized
gain (loss).................. 761,470 173,993 51,332 60,996 69,974 68,178 960,749 82,320 (1,792)
-------- -------- ------- ------- ------- ------- -------- ------- --------
Net increase (decrease) in net
assets from operations....... $765,280 $180,461 $55,735 $78,486 $82,230 $77,368 $954,022 $85,182 $ (73)
======== ======== ======= ======= ======= ======= ======== ======= ========
<CAPTION>
DGPF INTERNATIONAL EQUITY
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 19,799 $23,714 $13,052
-------- ------- -------
EXPENSES:
Mortality and expense risk
fees........................... 6,942 4,848 3,063
Administrative expense fees...... 1,602 1,347 850
-------- ------- -------
Total expenses................. 8,544 6,195 3,913
-------- ------- -------
Net investment income (loss)... 11,255 17,519 9,139
-------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 1,446 -- --
Net realized gain (loss) from
sales of investments........... 172,455 48,280 7,136
-------- ------- -------
Net realized gain (loss)....... 173,901 48,280 7,136
Net unrealized gain (loss)....... 8,616 25,042 1,321
-------- ------- -------
Net realized and unrealized
gain (loss).................. 182,517 73,322 8,457
-------- ------- -------
Net increase (decrease) in net
assets from operations....... $193,772 $90,841 $17,596
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ (4,191) $ 5,271 $ 6,692 $ 28,045 $ 24,849 $ 16,721
Net realized gain (loss)...... 298,715 30,216 201,768 (3,147) 2,137 1,016
Net unrealized gain (loss).... 390,796 241,984 (42,649) (34,245) 5,494 4,203
---------- ---------- ---------- -------- -------- --------
Net increase (decrease) in net
assets from operations...... 685,320 277,471 165,811 (9,347) 32,480 21,940
---------- ---------- ---------- -------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums.................. 668,382 549,451 474,684 68,770 106,779 78,302
Terminations.................. (25,563) (42,698) (36,020) (11,317) (1,055) (5,869)
Insurance and other charges... (232,114) (182,014) (112,391) (66,317) (62,772) (51,397)
Transfers between sub-accounts
(including fixed account),
net......................... 88,767 265,704 234,278 (50,514) 38,428 170,291
Other transfers from (to) the
General Account............. (45,396) (9,987) (11,385) (4,113) (11,488) (346)
---------- ---------- ---------- -------- -------- --------
Net increase (decrease) in net
assets from policy
transactions................ 454,076 580,456 549,166 (63,491) 69,892 190,981
---------- ---------- ---------- -------- -------- --------
Net increase (decrease) in net
assets...................... 1,139,396 857,927 714,977 (72,838) 102,372 212,921
NET ASSETS:
Beginning of year............. 2,091,232 1,233,305 518,328 526,652 424,280 211,359
---------- ---------- ---------- -------- -------- --------
End of year................... $3,230,628 $2,091,232 $1,233,305 $453,814 $526,652 $424,280
========== ========== ========== ======== ======== ========
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ 137,235 $ 80,943 $ 44,480 $ 4,765 $ 7,679 $ 4,760
Net realized gain (loss)...... -- -- -- 118,504 112,104 44,755
Net unrealized gain (loss).... -- -- -- 467,603 335,828 138,917
------------ ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations...... 137,235 80,943 44,480 590,872 455,611 188,432
------------ ---------- ---------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums.................. 1,586,382 2,774,444 945,902 957,622 661,891 415,586
Terminations.................. (11,589) (10,957) (15,755) (89,361) (27,950) (26,880)
Insurance and other charges... (182,843) (161,813) (169,825) (344,537) (229,505) (107,505)
Transfers between sub-accounts
(including fixed account),
net......................... (4,745,064) 853,393 (647,785) 414,842 463,763 421,672
Other transfers from (to) the
General Account............. 168 (101,110) 4,997 (54,860) (21,011) (9,563)
------------ ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................ (3,352,946) 3,353,957 117,534 883,706 847,188 693,310
------------ ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets...................... (3,215,711) 3,434,900 162,014 1,474,578 1,302,799 881,742
NET ASSETS:
Beginning of year............. 4,473,199 1,038,299 876,285 2,507,010 1,204,211 322,469
------------ ---------- ---------- ---------- ---------- ----------
End of year................... $ 1,257,488 $4,473,199 $1,038,299 $3,981,588 $2,507,010 $1,204,211
============ ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
-------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 7,228 $ 7,681 $ 11,558 $ (28,621) $ (20,584) $ (12,734)
Net realized gain (loss)....... 457 5,852 1,338 85,004 13,063 181,917
Net unrealized gain (loss)..... (8,093) (2,809) 1,652 1,204,487 252,556 110,749
-------- --------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations....... (408) 10,724 14,548 1,260,870 245,035 279,932
-------- --------- -------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums................... 44,274 95,098 41,916 892,571 804,937 687,842
Terminations................... (1,874) (973) (4,908) (97,714) (61,580) (38,504)
Insurance and other charges.... (17,458) (17,260) (18,542) (319,146) (254,458) (181,723)
Transfers between sub-accounts
(including fixed account),
net.......................... (14,099) (155,226) 6,563 (64,666) 317,596 382,030
Other transfers from (to) the
General Account.............. (1,115) (883) (252) (43,078) (28,614) (19,622)
-------- --------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................. 9,728 (79,244) 24,777 367,967 777,881 830,023
-------- --------- -------- ---------- ---------- ----------
Net increase (decrease) in net
assets....................... 9,320 (68,520) 39,325 1,628,837 1,022,916 1,109,955
NET ASSETS:
Beginning of year.............. 166,148 234,668 195,343 3,108,070 2,085,154 975,199
-------- --------- -------- ---------- ---------- ----------
End of year.................... $175,468 $ 166,148 $234,668 $4,736,907 $3,108,070 $2,085,154
======== ========= ======== ========== ========== ==========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ----------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (34,781) $ (18,589) $ (2,975) $ 5,347 $ 5,435 $ 3,676
Net realized gain (loss)....... 386,357 123,090 92,652 136,970 14,292 84,100
Net unrealized gain (loss)..... 961,880 702,679 178,767 128,030 145,405 27,327
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets from operations....... 1,313,456 807,180 268,444 270,347 165,132 115,103
---------- ---------- ---------- ---------- ---------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 1,228,991 999,953 506,794 360,238 350,473 290,841
Terminations................... (48,035) (35,723) (44,279) (10,043) (10,503) (12,453)
Insurance and other charges.... (415,890) (283,484) (115,457) (121,643) (91,077) (61,404)
Transfers between sub-accounts
(including fixed account),
net.......................... 513,102 626,504 665,618 155,186 92,433 175,800
Other transfers from (to) the
General Account.............. (84,537) (30,548) (20,719) (28,247) (12,707) (5,877)
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets from policy
transactions................. 1,193,631 1,276,702 991,957 355,491 328,619 386,907
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets....................... 2,507,087 2,083,882 1,260,401 625,838 493,751 502,010
NET ASSETS:
Beginning of year.............. 3,782,915 1,699,033 438,632 1,379,312 885,561 383,551
---------- ---------- ---------- ---------- ---------- --------
End of year.................... $6,290,002 $3,782,915 $1,699,033 $2,005,150 $1,379,312 $885,561
========== ========== ========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ----------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (15,046) $ 2,941 $ (102) $ (19,828) $ 15,300 $ 15,755
Net realized gain (loss)....... 99,276 9,059 171,055 963,452 488,196 37,766
Net unrealized gain (loss)..... (182,782) 50,238 13,106 235,229 (37,376) (30,852)
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets from operations....... (98,552) 62,238 184,059 1,178,853 466,120 22,669
---------- ---------- ---------- ---------- ---------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 529,885 489,905 346,332 351,678 595,682 338,808
Terminations................... (35,782) (29,370) (23,992) (28,047) (9,553) (15,339)
Insurance and other charges.... (180,869) (158,840) (95,362) (150,232) (127,924) (89,278)
Transfers between sub-accounts
(including fixed account),
net.......................... (7,256) 237,371 329,770 (722,028) (658,418) 268,785
Other transfers from (to) the
General Account.............. (29,927) (23,983) (14,737) 39,190 113,773 (23,143)
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets from policy
transactions................. 276,051 515,083 542,011 (509,439) (86,440) 479,833
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net
assets....................... 177,499 577,321 726,070 669,414 379,680 502,502
NET ASSETS:
Beginning of year.............. 1,806,937 1,229,616 503,546 1,351,584 971,904 469,402
---------- ---------- ---------- ---------- ---------- --------
End of year.................... $1,984,436 $1,806,937 $1,229,616 $2,020,998 $1,351,584 $971,904
========== ========== ========== ========== ========== ========
<CAPTION>
SELECT CAPITAL APPRECIATION SELECT EMERGING MARKETS
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
---------------------------------- DECEMBER 31, FROM 8/28/98*
1999 1998 1997 1999 TO 12/31/98
---------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (10,584) $ (8,189) $ (6,153) $ (29) $ (3)
Net realized gain (loss)....... 27,592 245,019 9,538 3,962 6
Net unrealized gain (loss)..... 301,462 (94,363) 124,106 17,411 636
---------- ---------- -------- -------- ------
Net increase (decrease) in net
assets from operations....... 318,470 142,467 127,491 21,344 639
---------- ---------- -------- -------- ------
FROM POLICY TRANSACTIONS:
Net premiums................... 248,326 238,989 248,779 30,379 3,450
Terminations................... (51,705) (7,801) (24,135) -- --
Insurance and other charges.... (94,545) (81,888) (72,669) (2,137) (51)
Transfers between sub-accounts
(including fixed account),
net.......................... 7,058 (54,554) 202,285 104,394 --
Other transfers from (to) the
General Account.............. (8,685) (14,064) (5,257) (2,491) --
---------- ---------- -------- -------- ------
Net increase (decrease) in net
assets from policy
transactions................. 100,449 80,682 349,003 130,145 3,399
---------- ---------- -------- -------- ------
Net increase (decrease) in net
assets....................... 418,919 223,149 476,494 151,489 4,038
NET ASSETS:
Beginning of year.............. 1,197,286 974,137 497,643 4,038 --
---------- ---------- -------- -------- ------
End of year.................... $1,616,205 $1,197,286 $974,137 $155,527 $4,038
========== ========== ======== ======== ======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC GROWTH FIDELITY VIP HIGH INCOME
YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31,
DECEMBER 31, FROM 8/28/98* -----------------------------------
1999 TO 12/31/98 1999 1998 1997
------------- ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (22) $ -- $ 122,947 $ 65,544 $ 32,646
Net realized gain (loss)....... 29 4 117,658 44,231 8,180
Net unrealized gain (loss)..... 746 584 9,877 (111,343) 70,794
------ ------ ---------- ---------- ---------
Net increase (decrease) in net
assets from operations....... 753 588 250,482 (1,568) 111,620
------ ------ ---------- ---------- ---------
FROM POLICY TRANSACTIONS:
Net premiums................... 1,543 3,450 427,596 1,273,594 342,979
Terminations................... -- -- (47,662) (22,374) (13,891)
Insurance and other charges.... (144) (50) (160,278) (152,456) (100,015)
Transfers between sub-accounts
(including fixed account),
net.......................... -- -- (174,420) (547,761) 148,582
Other transfers from (to) the
General Account.............. -- -- (84,991) (13,118) (6,135)
------ ------ ---------- ---------- ---------
Net increase (decrease) in net
assets from policy
transactions................. 1,399 3,400 (39,755) 537,885 371,520
------ ------ ---------- ---------- ---------
Net increase (decrease) in net
assets....................... 2,152 3,988 210,727 536,317 483,140
NET ASSETS:
Beginning of year.............. 3,988 -- 1,508,324 972,007 488,867
------ ------ ---------- ---------- ---------
End of year.................... $6,140 $3,988 $1,719,051 $1,508,324 $ 972,007
====== ====== ========== ========== =========
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ ------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 20,886 $ 10,554 $ 8,846 $ (32,737) $ (11,533) $ (5,599)
Net realized gain (loss)....... 233,517 219,981 284,916 654,383 343,447 82,256
Net unrealized gain (loss)..... (59,321) 70,169 151,595 1,009,768 669,786 294,634
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from operations....... 195,082 300,704 445,357 1,631,414 1,001,700 371,291
---------- ---------- ---------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums................... 783,575 839,036 606,490 1,259,362 821,750 713,592
Terminations................... (73,176) (51,214) (47,786) (135,241) (80,012) (42,813)
Insurance and other charges.... (281,075) (237,721) (175,469) (441,948) (328,094) (245,583)
Transfers between sub-accounts
(including fixed account),
net.......................... (55,541) 355,362 193,035 486,631 185,430 131,964
Other transfers from (to) the
General Account.............. (71,708) (32,653) (25,739) (104,844) (46,146) (21,930)
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................. 302,075 872,810 550,531 1,063,960 552,928 535,230
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
assets....................... 497,157 1,173,514 995,888 2,695,374 1,554,628 906,521
NET ASSETS:
Beginning of year.............. 3,542,393 2,368,879 1,372,991 3,844,181 2,289,553 1,383,032
---------- ---------- ---------- ---------- ---------- ----------
End of year.................... $4,039,550 $3,542,393 $2,368,879 $6,539,555 $3,844,181 $2,289,553
========== ========== ========== ========== ========== ==========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
VEL II ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II ASSET
FIDELITY VIP OVERSEAS MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 3,810 $ 6,468 $ 4,403 $ 17,490 $ 12,256 $ 9,190
Net realized gain (loss)....... 659,432 177,729 52,686 33,168 53,748 34,787
Net unrealized gain (loss)..... 102,038 (3,736) (1,354) 27,828 16,226 33,391
---------- ---------- -------- -------- -------- --------
Net increase (decrease) in net
assets from operations....... 765,280 180,461 55,735 78,486 82,230 77,368
---------- ---------- -------- -------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 194,570 210,720 181,454 116,710 114,823 73,468
Terminations................... (28,624) (29,913) (11,455) (7,765) (7,027) (4,575)
Insurance and other charges.... (74,580) (69,205) (54,192) (44,460) (33,662) (26,113)
Transfers between sub-accounts
(including fixed account),
net.......................... (305,825) 18,736 6,860 12,811 42,695 36,340
Other transfers from (to) the
General Account.............. (27,958) (519) (8,933) (2,041) (1,304) (1,692)
---------- ---------- -------- -------- -------- --------
Net increase (decrease) in net
assets from policy
transactions................. (242,417) 129,819 113,734 75,255 115,525 77,428
---------- ---------- -------- -------- -------- --------
Net increase (decrease) in net
assets....................... 522,863 310,280 169,469 153,741 197,755 154,796
NET ASSETS:
Beginning of year.............. 1,017,396 707,116 537,647 714,809 517,054 362,258
---------- ---------- -------- -------- -------- --------
End of year.................... $1,540,259 $1,017,396 $707,116 $868,550 $714,809 $517,054
========== ========== ======== ======== ======== ========
<CAPTION>
T. ROWE PRICE INTERNATIONAL
STOCK DGPF INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (6,727) $ 2,862 $ 1,719 $ 11,255 $ 17,519 $ 9,139
Net realized gain (loss)....... 999,205 14,426 10,092 173,901 48,280 7,136
Net unrealized gain (loss)..... (38,456) 67,894 (11,884) 8,616 25,042 1,321
---------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations....... 954,022 85,182 (73) 193,772 90,841 17,596
---------- -------- -------- ---------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 155,125 192,610 203,466 287,642 262,485 198,749
Terminations................... (5,354) (3,675) (11,363) (16,279) (11,489) (6,206)
Insurance and other charges.... (50,390) (44,942) (33,225) (105,243) (84,368) (43,358)
Transfers between sub-accounts
(including fixed account),
net.......................... 5,015,973 (45,846) 142,072 (95,790) 85,183 77,143
Other transfers from (to) the
General Account.............. (10,762) (8,596) (6,101) (20,065) (16,708) (14,189)
---------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from policy
transactions................. 5,104,592 89,551 294,849 50,265 235,103 212,139
---------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets....................... 6,058,614 174,733 294,776 244,037 325,944 229,735
NET ASSETS:
Beginning of year.............. 704,289 529,556 234,780 901,455 575,511 345,776
---------- -------- -------- ---------- -------- --------
End of year.................... $6,762,903 $704,289 $529,556 $1,145,492 $901,455 $575,511
========== ======== ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The VEL II Account (VEL II) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company), established on
April 1, 1994 for the purpose of separating from the general assets of the
Company those assets used to fund the variable portion of certain flexible
premium variable life policies issued by the Company. The Company is a
wholly-owned subsidiary of Allmerica Financial Corporation (AFC). Under
applicable insurance law, the assets and liabilities of VEL II are clearly
identified and distinguished from the other assets and liabilities of the
Company. VEL II cannot be charged with liabilities arising out of any other
business of the Company.
VEL II is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VEL II currently offers twenty
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Financial Investment Management Services, Inc. (AFIMS), an indirect wholly-owned
subsidiary of the Company; or of the Variable Insurance Products Fund (Fidelity
VIP) or the Variable Insurance Products Fund II (Fidelity VIP II) managed by
Fidelity Management & Research Company (FMR); or of T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.;
or of the Delaware Group Premium Fund (DGPF) managed by Delaware International
Advisers, Ltd.. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, and
DGPF (the Funds) are open-end, diversified, management investment companies
registered under the 1940 Act.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of VEL II. Therefore, no provision for income
taxes has been charged against VEL II.
SA-13
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------- ---------- ---------- ---------
<S> <C> <C> <C>
Growth................................................ 975,726 $2,621,199 $ 3.311
Investment Grade Income............................... 431,793 476,191 1.051
Money Market.......................................... 1,257,488 1,257,488 1.000
Equity Index.......................................... 980,687 3,001,397 4.060
Government Bond....................................... 173,558 181,191 1.011
Select Aggressive Growth.............................. 1,388,715 3,078,110 3.411
Select Growth......................................... 2,062,972 4,456,093 3.049
Select Growth and Income.............................. 1,037,325 1,674,048 1.933
Select Value Opportunity.............................. 1,304,692 2,059,820 1.521
Select International Equity........................... 995,075 1,793,625 2.031
Select Capital Appreciation........................... 787,241 1,266,515 2.053
Select Emerging Markets............................... 120,377 137,480 1.292
Select Strategic Growth............................... 5,453 4,810 1.126
Fidelity VIP High Income.............................. 151,994 1,708,762 11.310
Fidelity VIP Equity-Income............................ 157,120 3,692,567 25.710
Fidelity VIP Growth................................... 119,053 4,465,972 54.930
Fidelity VIP Overseas................................. 56,132 1,386,783 27.440
Fidelity VIP II Asset Manager......................... 46,521 740,925 18.670
T. Rowe Price International Stock..................... 355,195 6,731,382 19.040
DGPF International Equity............................. 61,486 1,063,515 18.630
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value.
The Company makes a charge of 0.65% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The mortality and expense risk charge may be increased or decreased by
the Board of Directors of the Company once each year, subject to compliance with
applicable state and federal requirements, but the total charge may not exceed
.90% per annum. The Company also charges each Sub-Account 0.15% per annum based
on the average daily net assets of each Sub-Account for administrative expenses.
These charges are deducted in the daily computation of unit values and are paid
to the Company on a daily basis.
SA-14
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Allmerica Investments, Inc., (Allmerica Investments), an indirect
wholly-owned subsidiary of the Company , is the principal underwriter and
general distributor of VEL II, and does not receive any compensation for sales
of VEL II policies. Commissions are paid to registered representatives of
Allmerica Investments and of certain independent broker-dealers by the Company.
As the current series of policies have a surrender charge, no deduction is made
for sales charges at the time of the sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VEL II satisfies the current requirements of
the regulations, and it intends that VEL II will continue to meet such
requirements.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by VEL II
during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- -------------------- ------------ ------------
<S> <C> <C>
Growth...................................................... $ 1,119,066 $ 431,982
Investment Grade Income..................................... 99,897 134,930
Money Market................................................ 222,002,261 225,217,972
Equity Index................................................ 1,481,959 588,637
Government Bond............................................. 92,365 75,409
Select Aggressive Growth.................................... 773,896 434,550
Select Growth............................................... 2,384,404 1,073,413
Select Growth and Income.................................... 569,130 83,998
Select Value Opportunity.................................... 641,802 271,901
Select International Equity................................. 115,768,568 116,297,835
Select Capital Appreciation................................. 621,254 529,365
Select Emerging Markets..................................... 158,295 28,179
Select Strategic Growth..................................... 1,558 181
Fidelity VIP High Income.................................... 72,227,693 72,139,306
Fidelity VIP Equity-Income.................................. 1,545,076 1,106,536
Fidelity VIP Growth......................................... 2,413,935 940,305
Fidelity VIP Overseas....................................... 37,789,720 38,002,716
Fidelity VIP II Asset Manager............................... 154,423 31,556
T. Rowe Price International Stock........................... 64,460,623 59,351,449
DGPF International Equity................................... 8,146,808 8,083,842
------------ ------------
Totals.................................................... $532,452,733 $524,824,062
============ ============
</TABLE>
SA-15
<PAGE>
VEL II ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-16
<PAGE>
PART II
UNDERTAKINGS AND REPRESENTATIONS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
RULE 484 UNDERTAKING
To the fullest extent permissible under Massachusetts General Laws, no director
shall be personally liable to the Company or any policy holder for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provisions of law to the contrary; provided, however, that this provision shall
not eliminate or limit the liability of a director;
1. for any breach of the director's duty of loyalty to the Company or its
policy holders;
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance companies
pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c. 156B Section 62;
4. for any transactions from which the director derived an improper personal
benefit.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b) PLANS AND
UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.
The Company and its registered separate accounts which fund annuity contracts
issued in connection with Section 403(b) plans have relied (a) on Rule 6c-7
under the 1940 Act with respect to withdrawal restrictions under the Texas
Optional Retirement Program ("Program") and (b) on the "no-action" letter (Ref.
No. IP-6-88) issued on November 28, 1988 to the American Council of Life
Insurance, in applying the withdrawal restrictions of Internal Revenue Code
Section 403(b)(11). The variable life insurance Policies issued by the
Registrant may be issued in connection with Section 403(b) plans ("Plans"), and
would be subject to the same restrictions on redeemability which are applicable
to annuity contracts issued to such Plans. While the Company and the Registrant
are relying on the exemptions provided by Rule 6e-3(T) in connection with the
issuance of the Policies in connection with the Plans, the Company and the
Registrant represent that they will take the following steps in connection with
the issuance of the Policies to Section 403(b) plans:
1. Appropriate disclosures regarding the redemption restrictions imposed by
the Program and by Section 403(b)(11) have been included in the prospectus
of each registration statement used in connection with the offer of the
Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed by
the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the redemption
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.
4. A signed statement acknowledging the participant's understanding of (i)
the restrictions on redemption imposed by the Program and by Section
403(b)(11) and (ii) the investment alternatives available under the
employer's arrangement will be obtained from each participant who
purchases a variable annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not so
denied or limited will be effected as expeditiously as possible.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement amendment comprises the following papers and
documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 76 pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the 1933 Act.
Representations pursuant to Section 26(e) of the 1940 Act.
Representations Concerning Withdrawal Restrictions on Section 403(b) Plans and
under the Texas Optional Retirement Program.
The signatures.
Written consents of the following persons:
1. Actuarial Consent
2. Opinion of Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company of January 21, 1993 establishing the VEL II Account
was previously filed on April 16, 1998 in Post-Effective
Amendment No. 7, and is incorporated by reference herein.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement
between the Company and Allmerica Investments, Inc. was
previously filed on April 16, 1998 in Post-Effective
Amendment No. 7, and is incorporated by reference
herein.
(b) Registered Representatives/Agents Agreement was
previously filed on April 16, 1998 in Post-Effective
Amendment No. 7, and is incorporated by reference
herein.
(c) Commission Schedule was previously filed on April 16,
1998 in Post-Effective Amendment No. 7, and is
incorporated by reference herein.
(d) General Agents Agreement was previously filed on
April 16, 1998 in Post-Effective Amendment No. 7, and is
incorporated by reference herein.
(e) Career Agent Agreement was previously filed on April 16,
1998 in Post-Effective Amendment No. 7, and is
incorporated by reference herein.
<PAGE>
(4) Not Applicable.
(5) The Policy and initial Policy endorsements were
previously filed on April 16, 1998 in Post-Effective
Amendment No. 7, and are incorporated by reference
herein. The following endorsements were previously filed
in Post-Effective Amendment No. 8 of Registration
Statement No. 33-57792 on February 27, 1997, and are
incorporated by reference herein:
X Paid up Life Insurance Option Endorsement
X Preferred Loan Endorsement
X 403(b) Life Insurance Policy Endorsement
The Guaranteed Death Benefit Rider was previously filed
on April 16, 1998 in Post-Effective Amendment No. 7, and
is incorporated by reference herein.
(6) Restated Articles of Incorporation and Bylaws of the Company
were previously filed on October 16, 1995 in Post-Effective
Amendment No. 3, and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement between the Company and
Allmerica Investment Trust dated March 22, 2000 is filed
herewith.
(b) Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Insurance Products
Fund Participation Agreement is filed herewith.
Participation Agreement with Variable Insurance Products
Fund, as amended, was previously filed on April 16, 1998
in Post-Effective Amendment No. 12, and is incorporated
by reference herein.
(c) Amendment dated March 29, 2000 and Amendment dated
October 4, 1999 to the Variable Insurance Products
Fund II Participation Agreement is filed herewith.
Participation Agreement with Variable Insurance Products
Fund II, as amended, was previously filed on April 16,
1998 in Post-Effective Amendment No. 12, and is
incorporated by reference herein.
(d) Form of Amendment to the Delaware Group Premium Fund
Participation Agreement is filed herewith. Participation
Agreement with Delaware Group Premium Fund, Inc. was
previously filed on April 16, 1998 in Post-Effective
Amendment No. 11, and is incorporated by reference
herein.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed on April 16, 1998 in
Post-Effective Amendment No. 7, and is incorporated by
reference herein.
(f) Fidelity Service Agreement was previously filed on
April 30, 1996 in Post-Effective
<PAGE>
Amendment No. 6 (Registration Statement No. 33-57792),
and is incorporated by reference herein.
(g) An Amendment to the Fidelity Service Agreement,
effective as of January 1, 1997, was previously filed on
April 30, 1997 in Post-Effective Amendment No. 9
(Registration Statement No. 33-57792), and is
incorporated by reference herein.
(h) Fidelity Service Contract, effective as of January 1,
1997, was previously filed on April 30, 1997 in
Post-Effective Amendment No. 9 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(i) Service Agreement with Rowe Price-Fleming International,
Inc. was previously filed on April 16, 1998 in
Post-Effective Amendment No. 7, and is incorporated by
reference herein.
(9) (a) BFDS Agreements for lockbox and mailroom services were
previously filed on April 16, 1998 in Post-Effective
Amendment No. 7, and are incorporated by reference
herein.
(b) Directors' Power of Attorney is filed herewith.
(10) Applications were previously filed on April 16, 1998 in
Post-Effective Amendment No. 7, and are incorporated by
reference herein.
2. The Policy and Policy riders are as set forth in Item 1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum dated October, 1993 pursuant to Rule
6e-3(T)(b)(12)(iii) under the 1940 Act, which includes conversion
procedures pursuant to Rule 6e-3(T)(b)(13)(v)(B), was previously
filed on April 16, 1998 in Post-Effective Amendment No. 7, and is
incorporated by reference herein.
8. Consent of Independent Accountants is filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 3rd day of April,
2000.
VEL II ACCOUNT
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
-----------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 3, 2000
- ----------------------------
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief Financial Officer
- ----------------------------
Richard M. Reilly* Director and Vice President
- ----------------------------
John F. O'Brien* Director, President and Chief Executive Officer
- ----------------------------
Bruce C. Anderson* Director and Vice President
- ----------------------------
Mark R. Colborn* Director and Vice President
- ----------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment Officer
- ----------------------------
J. Kendall Huber* Director, Vice President and General Counsel
- ----------------------------
J. Barry May* Director
- ----------------------------
James R. McAuliffe* Director
- ----------------------------
Robert P. Restrepo, Jr.* Director and Vice President
- ----------------------------
Eric A. Simonsen* Director and Vice President
- ----------------------------
</TABLE>
* Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-71056)
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(8)(a) Participation Agreement between the Company
and Allmerica Investment Trust dated March 22, 2000
Exhibit 1(8)(b) Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Insurance Products Fund
Participation Agreement
Exhibit 1(8)(c) Amendment dated March 29, 2000 and Amendment dated
October 4, 1999 to the Variable Insurance Products
Fund II Participation Agreement
Exhibit 1(8)(d) Form of Amendment to the Delaware Group Premium Fund
Participation Agreement
Exhibit 1(9)(b) Directors' Power of Attorney
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA INVESTMENT TRUST
ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DATED
MARCH 22 , 2000
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of Allmerica Investment Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 22nd day of March, 2000 by and
among: FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); ALLMERICA INVESTMENT TRUST, an unincorporated Massachusetts business
trust (hereinafter the "Fund"), and ALLMERICA FINANCIAL INVESTMENT MANAGEMENT
SERVICES, INC. (hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares, each
representing the interest in a particular managed portfolio of securities and
other assets (each such series hereinafter referred to as a "Portfolio"), any
one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, Allmerica Investments, Inc. (the "Distributor") is registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (hereinafter
the "1934 Act"), is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, the Company either has registered or will register certain
Variable Products under the 1933 Act or the Contracts are not registered because
they are properly exempt from registration under Section 3(a)(2) of the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under Section 4(2) or Regulation D of the 1933 Act; and
3
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has either: (i) registered or will
register each Account as a unit investment trust under the 1940 Act; or (ii)
will not register such Account pursuant to the exemptions provided in Sections
3(c)(1) or 3(c)(7) of the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any full
or fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. For purposes of this Section 1.4,
the Company shall be the designee of the Fund for receipt of requests for
redemption from each Account and receipt by such designee of a request prior to
the close of regular trading on the NYSE shall constitute receipt by the Fund,
provided that the Fund receives notice of such request for redemption on the
next following Business Day.
4
<PAGE>
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Shares
ordered from the Fund will be recorded in an appropriate title for each Account
or the appropriate subaccount of each Account.
1.8. The Fund shall furnish same day notice (by wire or telephone, followed
by written confirmation) to the Company of any income, dividends or capital gain
distributions payable on the Fund's shares. The Company hereby elects to receive
all such income dividends and capital gain distributions as are payable on the
Portfolio shares in additional shares of that Portfolio. The Company reserves
the right to revoke this election and to receive all such income dividends and
capital gain distributions in cash. The Fund shall notify the Company of the
number of shares so issued as payment of such dividends and distributions.
1.9. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Variable Products either
(i) are or will be registered under the 1933 Act; or (ii) are not registered
because they are properly exempt from registration under Section 3(a)(2) of the
1933 Act or will be offered exclusively in transactions that are properly exempt
from registration under Section 4(2) or Regulation D of the 1933 Act, in which
case the Company will make every effort to maintain such exemption and will
notify the Fund immediately upon having a reasonable basis for believing that
such exemption no longer applies or might not apply in the future.
2.2. The Company represents and warrants that with respect to any Accounts
which are exempt from registration under the 1940 Act in reliance on 3(c)(1) or
3(c)(7) thereof: (i) the principle underwriter for each such Account and any
sub-accounts thereof is a registered broker-dealer with the SEC under the 1934
Act; (ii) the shares of the Portfolios of the Trust are an will continue to be
the only investment securities held by the corresponding sub-accounts; and (iii)
with regard to each Portfolio, the Company, on behalf of the corresponding
sub-account.
2.3. The Company represents and warrants that the Variable Products will be
issued and sold in compliance in all material respects with all applicable
federal and state laws, and that the sale of the Variable Products shall comply
in all material respects with state insurance suitability requirements. The
Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable law, that it has legally and
validly established each Account as a segregated asset account under the
Massachusetts Insurance Code, and each Account either (i) has been registered
or, prior to any issuance or sale of the Contracts, will be registered as a unit
investment trust under the
5
<PAGE>
1940 Act to serve as a segregated investment account for the Variable Products;
or (ii) has not been so registered in proper reliance upon an exemption from
registration under Section 3(c) of the 1940 Act.
2.4. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act. The
Fund shall amend the registration statement for its shares under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund.
2.5. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.6. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.7. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.8. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.9. The Fund represents that it is lawfully organized and validly existing
under the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with the 1940 Act.
2.10. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.11. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
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2.12. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid, which
includes coverage for larceny and embezzlement, shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund and the Distributor promptly in writing in the event
that such coverage no longer applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document. Alternatively, the Company may print
the Fund's prospectus and/or its statement of additional information in
combination with other fund companies' prospectuses and statements of additional
information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of its
proxy statements, reports to shareholders, and other communications (except for
prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing these documents to current
contract owners, and the Company shall bear the cost for such documents used for
purposes other than distribution to current contract owners.
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3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material in
which the Fund or the Adviser(s) is named, at least fifteen Business Days prior
to its use. No such material shall be used if the Fund or its designee
reasonably objects to such use within fifteen Business Days after receipt of
such material.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund in connection with
the sale of the Variable Products other than the information or representations
contained in the registration statement or prospectus for the Fund shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or in reports or proxy statements for the Fund, or in sales
literature or other promotional material approved by the Fund or its designee,
except with the permission of the Fund.
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4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement, prospectus or private placement
memorandum for the Variable Products, as such registration statement, prospectus
and private placement memorandum may be amended or supplemented from time to
time, or in published reports for each Account which are in the public domain or
approved by the Company for distribution to contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
private placement memorandums, reports, solicitations for voting instructions,
sales literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the investment in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (I.E., any
written communication distributed or made generally available to customers or
the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, private placement memorandums, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the
Distributor may make payments to the Company or to the distributor for the
Variable Products if and in amounts agreed to by the Distributor in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund
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<PAGE>
and the Adviser or by another party. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by Variable Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
The responsibilities to report such information and conflicts and to assist the
Board will be carried out with a view only to the interests of contract owners
and plan participants, as applicable.
7.3. If it is determined by a majority of the Board, or a majority of its
members who are not "interested persons" of the Fund, the Adviser or the Company
as that term is defined in the 1940 Act (hereinafter "disinterested members"),
that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy
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or eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Distributor and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund be required to establish a new funding medium for the Variable
Products. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Variable Products if an offer to do so has been declined
by vote of a majority of contract owners materially adversely affected by the
irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
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8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement,
prospectus or private placement memorandum for the Variable Products or
contained in the Variable Products or sales literature for the Variable
Products (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to the Company
by or on behalf of the Fund for use in the registration statement,
prospectus or private placement memorandum for the Variable Products or in
the Variable Products or sales literature (or any amendment or supplement)
or otherwise for use in connection with the sale of the Variable Products
or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Fund or an Adviser) or unlawful conduct
of the Company or persons under its control, with respect to the sale or
distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
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performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER
8.2(a). The Adviser agrees, with respect to each Portfolio that it manages,
to indemnify and hold harmless the Company, each of its directors, officers, and
employees, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and
individually, "Indemnified Party," for purposes of this Section 8.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Adviser) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of shares of the Portfolio
that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Products not
supplied by the Fund or persons under its control and other than
statements
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or representations authorized by the Company) or unlawful conduct of the
Fund, Adviser(s) or Distributor or persons under their control, with
respect to the sale or distribution of the Variable Products or Portfolio
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for
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purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the
15
<PAGE>
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60) days
advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company reasonably believes
that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.1(h) termination by either the Company or the Fund if the exemption from
registration under Section 3(c) of the 1940 Act no longer applies, or might not
apply in the future, to the unregistered Accounts, or that the exemption from
registration under Section 4(2) or Regulation D promulgated under the 1933 Act
no longer applies or might not apply in the future, to interests under the
unregistered Contracts.
10.2. Notwithstanding any termination of this Agreement, the Fund shall, at
the option of the Company, continue to make available additional shares of the
Fund pursuant to the terms and conditions of this Agreement, for all Variable
Products in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Variable Products"). Specifically, without
limitation, the owners of the Existing Variable Products shall be permitted to
direct reallocation of investments in the Portfolios of the Fund, redemption of
investments in the Portfolios of the Fund and/or investment in the
16
<PAGE>
Portfolios of the Fund upon the making of additional purchase payments under the
Existing Variable Products. The parties agree that this Section 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the Variable
Products (as distinct from Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement contract owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Allmerica Investment Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Financial Investment Management Services, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
17
<PAGE>
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
18
<PAGE>
By: /s/ Richard M. Reilly
NAME: Richard M. Reilly
TITLE: Vice President
ALLMERICA INVESTMENT TRUST
By: /s/ John P. Kavanaugh
NAME: John P. Kavanaugh
TITLE: Vice President
ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
By: /s/ Paul T. Kane
NAME: Paul T. Kane
TITLE: Vice President
19
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
---------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VEL II VEL (> 93) 33-71050 811-8130
Inheiritage Inheiritage 33-74184 811-8304
Select Inheiritage
Allmerica Select Separate Account II Select Life 333-62369 811-8987
Group Vel Group VEL 333-06383 811-7663
FUVUL Separate Account ValuePlus Assurance Pending Pending
[To Be Determined] [PremierFocus] N/A N/A
<CAPTION>
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
<S> <C> <C> <C>
VA-K ExecAnnuity Plus 91 33-71052 811-8114
ExecAnnuity Plus 93
Allmerica Advantage
Allmerica Select Separate Account Allmerica Select Resource I 33-71058 811-8116
Allmerica Select Resource II
Allmerica Select Charter
Separate Accounts VA-A, VA-B, VA-C, Variable Annuities (discontinued)
VA-G, VA-H
- -------------------------------------------------------------------------------------------------------
Fulcrum Separate Account Fulcrum 333-16929 811-7947
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE B
PORTFOLIOS OF
ALLMERICA INVESTMENT TRUST
Select Emerging Markets Fund
Select International Equity Fund
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Select Growth Fund
Core Equity Fund (formerly Growth Fund)
Equity Index Fund
Select Growth and Income Fund
Select Income Fund
Select Investment Grade Income Fund
(formerly Investment Grade Income Fund)
Government Bond Fund
Money Market Fund
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
- - The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
- - Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund , as soon as possible, but no later than
two weeks after the Record Date.
- - The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.43 of the
Agreement to which this Schedule relates.
- - The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
- name (legal name as found on account registration)
- address
- fund or account number
- coding to state number of units
- individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
- - During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
- Voting Instruction Card(s)
- One proxy notice and statement (one document)
- return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
- "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
- cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
- - The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
- - Package mailed by the Company.
The Fund must allow at least a 15-day solicitation time to the Company as
the shareowner. (A 5-week period is recommended.) Solicitation time is
calculated as calendar days from (but NOT including,) the meeting,
counting backwards.
- - Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
- - Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
- - If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
- - There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If
<PAGE>
the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) The Fund must
review and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
<PAGE>
Amendment to Participation Agreement
First Allmerica Financial Life Insurance Company, Variable Insurance Products
Fund and Fidelity Distributors Corporation, hereby amend their Participation
Agreement, dated February 18, 1994 and as subsequently amended, by replacing
section 2.5 in its entirety with the following:
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may
make such payments in the future. The Fund has adopted a "no fee" or
"defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have
a board of trustees, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) With respect to Service Class shares and Service Class 2
shares, the Fund has adopted Rule 12b-1 Plans under which it makes
payments to finance distribution expenses. The Fund represents and
warrants that it has a board of trustees, a majority of whom are not
interested persons of the Fund, which has formulated and approved each of
its Rule 12b-1 Plans to finance distribution expenses of the Fund and that
any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly
constituted board of trustees.
IN WITNESS WHEREOF, each party has caused this Amendment to be executed in its
name and on its behalf by its duly authorized representative as of March 29,
2000.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY VARIABLE INSURANCE PRODUCTS FUND
By: /s/ Richard M Reilly By: /s/ Robert C. Pozen
Name: Richard M Reilly Name: Robert C. Pozen
Title: President Title: Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
Name: Kevin J. Kelly
Title: Vice President
<PAGE>
Amendment to the Participation Agreement
Among
Variable Insurance Products Fund
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
Whereas, First Allmerica Financial Life Insurance Company, Variable Insurance
Products Fund, and Fidelity Distributors Corporation entered into a
Participation Agreement on February 18, 1994 ("Participation Agreement"); and
WHEREAS, the parties desire to amend the Participation Agreement and restate in
its entirety Schedule A by mutual written consent;
Now, therefore, the parties do hereby agree:
1. "State Mutual Life Assurance Company of America" is hereby replaced with
"First Allmerica Financial Life Insurance Company."
2. To amend and update Schedule A to the Participation Agreement by adopting the
attached Schedule A, dated November 13, 1998, and by substituting the attached
Schedule A for and any all prior amendments to Schedule A, as may have been
adopted from time-to-time.
All terms and conditions of the Participation Agreement and Schedule thereto
shall continue in full force and effect except as modified hereby.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
Name: Richard M. Reilly
Title: President
Date: May 1, 1999
VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS
CORPORATION
By: /s/ Robert C. Pozen By: /s/ Kevin J. Kelly
Name: Robert C. Pozen Name: Kevin J. Kelly
Title: Senior Vice President Title: Vice President
Date: 3/9/99 Date 3/4/99
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Amended Schedule A to Participation Agreement Dated February 18, 1994
(Products funded by Portfolios of Variable Insurance Products Fund as of 1/1/99)
<TABLE>
<CAPTION>
SEPARATE ACCOUNT* PRODUCT NAME REGISTRATION. EFFECTIVE DATE
- ---------------- ------------ ------------- --------------
<S> <C> <C> <C>
VEL II VEL >93 33-71056 3/15/94
(Variable Life) Policy Form 1018.1-94 811-8130
Inheiritage Inheiritage 33-74184 3/15/94
(Variable Life) Policy Form 1026.1-94 811-8304
Group VEL Group VEL 333-06383
(Variable Life) Policy Form 1029.1-94 811-7663
VA-K ExecAnnuity Plus 33-71052 3/15/94
(Annuity) Policy Form A3018-94 811-8814
Separate Account I Group IRA 33-47858 10/9/92
(Annuity) Policy Forms 811-8814
GA-IRA-2.00-92
GAC-IRA-2.00-92
Allmerica Select Select Resource 33-71058 3/15/94
(Annuity) Policy Form 811-8116
A3020-94 GRC
Select Charter 333-63087
Policy Form 811-8116
A3027-98
</TABLE>
* The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991
<PAGE>
Amendment to Participation Agreement
First Allmerica Financial Life Insurance Company, Variable Insurance Products
Fund II and Fidelity Distributors Corporation, hereby amend their Participation
Agreement, dated March 1, 1994 and as subsequently amended, by replacing section
2.5 in its entirety with the following:
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may
make such payments in the future. The Fund has adopted a "no fee" or
"defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have
a board of trustees, a majority of whom are not interested persons of the
Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
(b) With respect to Service Class shares and Service Class 2
shares, the Fund has adopted Rule 12b-1 Plans under which it makes
payments to finance distribution expenses. The Fund represents and
warrants that it has a board of trustees, a majority of whom are not
interested persons of the Fund, which has formulated and approved each of
its Rule 12b-1 Plans to finance distribution expenses of the Fund and that
any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly
constituted board of trustees.
IN WITNESS WHEREOF, each party has caused this Amendment to be executed in its
name and on its behalf by its duly authorized representative as of March 29,
2000.
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY VARIABLE INSURANCE PRODUCTS FUND II
By: /s/ Richard M Reilly By: /s/ Robert C. Pozen
Name: Richard M Reilly Name: Robert C. Pozen
Title: President Title: Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Kevin J. Kelly
Name: Kevin J. Kelly
Title: Vice President
<PAGE>
Amendment to Schedule A to Participation Agreement
among
Variable Insurance Products Fund II
Fidelity Distributors Corporation
and
First Allmerica Financial Life Insurance Company
WHEREAS, First Allmerica Financial Life Insurance Company, Variable Insurance
Products Fund II, and Fidelity Distributors Corporation entered into a
Participation Agreement on March 1, 1994 ("Participation Agreement"); and
WHEREAS, the parties desire to amend the Participation Agreement and restate in
its entirety Schedule A by mutual written consent;
NOW, THEREFORE, the parties do hereby agree:
1. "State Mutual Life Assurance Company of America" is hereby replaced with
"First Allmerica Financial Life Insurance Company."
2. To replace Schedule A to the Participation Agreement and any amendments
thereto with the attached Schedule A dated October 4, 1999.
All terms and conditions of the Participation Agreement and Schedule thereto
shall continue in full force and effect except as modified hereby.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representative as of the
date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
Name: Richard M. Reilly
Title: Vice President
Date: October 6, 1999
VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION
By: /s/ Robert C. Pozen By: /s/ Kevin J. Kelly
Name: Robert C. Pozen Name: Kevin J. Kelly
Title: Senior Vice President Title: Vice President
Date: 10/19/99 Date 10/15/99
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY Amended Schedule A to Participation Agreement
Dated March 1, 1994
(Products funded by Portfolios of Variable Insurance Products Fund II
as of 10/4/99)
<TABLE>
<CAPTION>
SEPARATE ACCOUNT* PRODUCT NAME REGISTRATION
- ---------------- ------------ ------------
<S> <C> <C>
VEL VEL >87 33-14672
(Variable Life) Policy Form 1018-87 811-5183
VEL >91 33-90320
Policy Form 1018-91 811-5183
VEL PLUS 33-42687
Policy Forms 1023-91; 811-5183
1023-93
VEL II VEL >93 33-57792
(Variable Life) Policy Form 1018-93 811-7466
Inheiritage Inheiritage 33-70948
(Variable Life) Policy Form 1026-94 811-8120
Group VEL Group VEL 33-82658
(Variable Life) Policy Form 1029-94 811-8704
VA-K ExecAnnuity 33-39702
(Annuity) ExecAnnuity Plus 811-6293
Advantage
Policy Forms 3018-91;
3021-93;3025-96; 8025-96
</TABLE>
*The establishment of the Separate Accounts was authorized by vote of the Board
of Directors dated August 21, 1991.
<PAGE>
Amendment to the Participation Agreement
among
Delaware Group Premium Fund, Inc.
Delaware Distributors, Inc.
Allmerica Financial Life Insurance and Annuity Company
And
First Allmerica Financial Life Insurance Company
WHEREAS, Delaware Group Premium Fund, Inc., Delaware Distributors, Inc.,
Allmerica Financial Life Insurance and Annuity Company (formerly SMA Life
Assurance Company) and First Allmerica Financial Life Insurance Company
(formerly State Mutual Life Assurance Company of America) entered into a
Participation Agreement on December 23, 1991 ("Participation Agreement"); and
WHEREAS, the Participation Agreement provides for the amendment of Schedules 1,
2 and 3 thereto by mutual written consent of the parties from time to time in
accordance with the provisions of Article XI thereof, and the parties now wish
to amend and restate in their entirety Schedules 1, 2 and 3; and
WHEREAS, the parties wish to amend Section 3.1 under Article III; and
NOW, THEREFORE, the parties do hereby agree:
1. To replace Schedules 1, 2 and 3 of the Participation Agreement and any
amendments thereto with the attached Schedules 1, 2 and 3 dated May 1,
2000.
2. To insert the following sentence after the last sentence of Section 3.1 of
the Participation Agreement: Notwithstanding the foregoing and solely with
respect to the Account assets supporting the Delaware ExecutiveSolutions
variable life contracts, the cost of printing the Fund Prospectuses shall
be borne by the Fund and the cost of printing the Contracts Prospectus
shall be borne by the Distributor or its affiliate.
3. All terms and conditions of the Participation Agreement and Schedules
thereto shall continue in full force and effect except as modified hereby.
In witness whereof, each of the parties has caused this agreement to be executed
in its name and on its behalf by its duly authorized representatives as of the
date specified below.
DELAWARE DISTRIBUTORS, L.P.
DELAWARE GROUP PREMIUM FUND, INC. By: DELAWARE DISTRIBUTORS, INC.
(General Partner)
By: ________________________ By: ________________________
Name: Name:
Title: Title:
Date: ________________________ Date: ________________________
ALLMERICA FINANCIAL LIFE INSURANCE FIRST ALLMERICA FINANCIAL LIFE
AND ANNUITY COMPANY INSURANCE COMPANY
By: ________________________ By: ________________________
Name: Richard M. Reilly Name: Richard M. Reilly
Title: President Title: Vice President
Date: ________________________ Date: ________________________
<PAGE>
SCHEDULE 1
SEPARATE ACCOUNTS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY ("AFLIAC") AND FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
("FAFLIC") INVESTING IN THE FUND
As of May 1, 2000
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
Of AFLIAC
Separate Account VA-P October 27, 1994
Of AFLIAC
Separate Account VEL June 3, 1987
Of AFLIAC
Separate Account VEL II January 21, 1993
Of AFLIAC
Separate Account VEL III June 13, 1996
Of AFLIAC
Separate Account Inheiritage September 15, 1993
Of AFLIAC
Fulcrum Separate Account June 13, 1996
Of AFLIAC
Fulcrum Variable Life Separate Account June 13, 1996
Of AFLIAC
Group VEL Separate Account May 1, 1995
Of AFLIAC
Separate Account SPL-D June 13, 1996
Of AFLIAC
Separate Account IMO June 13, 1996
Of AFLIAC
Separate Account VA-K August 20, 1991
Of FAFLIC
Separate Account VA-P August 20, 1991
Of FAFLIC
Separate Account VEL II August 20, 1991
Of FAFLIC
Separate Account Inheiritage August 20, 1991
Of FAFLIC
Fulcrum Separate Account June 13, 1996
Of FAFLIC
Group VEL Separate Account November 13, 1996
Of FAFLIC
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
And Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of May 1, 2000
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual Delaware Golden Medallion Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund, Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual Allmerica Advantage Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Allmerica Accumulator Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund, Inc.
Individual Pioneer Vision 1 & 2 Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-P and investing in shares of Delaware Group
Premium Fund, Inc.
Individual Pioneer C-Vision Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-P and investing in shares of Delaware Group Premium Fund,
Inc.
Individual Pioneer Xtra Vision Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-P and investing in shares of Delaware Group Premium Fund,
Inc.
Individual VEL Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of Fulcrum
Separate Account and investing in shares of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Life Insurance Policies funded by sub-accounts of
Fulcrum Variable Life Separate Account and investing in shares of Delaware Group
Premium Fund, Inc.
Group Variable Life Insurance Policies funded by sub-accounts of Group VEL
Account and investing in shares of Delaware Group Premium Fund, Inc.
Individual Variable Life Policies funded by sub-accounts of Separate Account
SPL-D and investing in shares of Delaware Group Premium Fund, Inc.
<PAGE>
Individual Variable Life Policies funded by sub-accounts of Separate Account IMO
and investing in shares of the International Equity Series of Delaware Group
Premium Fund, Inc.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Individual Delaware Medallion Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of Delaware Group Premium Fund,
Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-K and investing in shares of the International Equity Series
of Delaware Group Premium Fund, Inc.
Individual Allmerica Advantage Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Allmerica Accumulator Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware Group
Premium Fund, Inc.
Individual Pioneer Vision 1 & 2 Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-P and investing in shares of Delaware Group
Premium Fund, Inc.
Individual Pioneer C-Vision Variable Annuity Contracts funded by sub-accounts of
Separate Account VA-P and investing in shares of Delaware Group Premium Fund,
Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by sub-accounts
of Separate Account Inheiritage and investing in shares of the International
Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of Fulcrum
Separate Account and investing in shares of Delaware Group Premium Fund, Inc.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of May 1, 2000
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Advantage"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Accumulator"
Individual Variable Annuity Contracts Marketed under the name "Pioneer
Vision 1 & 2"
Individual Variable Annuity Contracts Marketed under the name "Pioneer C-Vision"
Individual Variable Annuity Contracts Marketed under the name "Pioneer Xtra
Vision"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Individual Variable Life Insurance Policies Marketed under the name "Fulcrum
Variable Life (SPVUL)"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
Individual Variable Life Insurance Policies Marketed under the name "VUL 2001"
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity Plus"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Advantage"
Individual Variable Annuity Contracts Marketed under the name "Allmerica
Accumulator"
Individual Variable Annuity Contracts Marketed under the name "Pioneer
Vision 1 & 2"
Individual Variable Annuity Contracts Marketed under the name "Pioneer C-Vision"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
J. Kendall Huber, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and with any
other regulatory agency or state authority that may so require, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 4/2/2000
- ------------------------------------- Officer --------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/2/2000
- ------------------------------------- --------
Bruce C. Anderson
/s/ Mark R. Colborn Director and Vice President 4/2/2000
- ------------------------------------- --------
Mark R. Colborn
/s/ John P. Kavanaugh Director, Vice President and 4/2/2000
- ------------------------------------- Chief Investment Officer --------
John P. Kavanaugh
/s/ J. Kendall Huber Director, Vice President and 4/2/2000
- ------------------------------------- General Counsel --------
J. Kendall Huber
/s/ J. Barry May Director 4/2/2000
- ------------------------------------- --------
J. Barry May
/s/ James R. McAuliffe Director 4/2/2000
- ------------------------------------- --------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, and Chief Financial 4/2/2000
- ------------------------------------- Officer --------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/2/2000
- ------------------------------------- --------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/2/2000
- ------------------------------------- --------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/2/2000
- ------------------------------------- --------
Eric A. Simonsen
</TABLE>
<PAGE>
April 10, 2000
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: VEL II (93) ACCOUNT OF FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-71056 AND 811-8130
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
the VEL II Account on Form S-6 under the Securities Act of 1933 with respect to
the Company's individual flexible premium variable life insurance policies.
I am of the following opinion:
1. The VEL II Account is a separate account of the Company validly existing
pursuant to the Massachusetts Insurance Code and the regulations issued
thereunder.
2. The assets held in the VEL II Account equal to the reserves and other
Policy liabilities of the Policies which are supported by the VEL II
Account are not chargeable with liabilities arising out of any other
business the Company may conduct.
3. The individual flexible premium variable life insurance policies, when
issued in accordance with the Prospectus contained in the Post-Effective
Amendment to the Registration Statement and upon compliance with
applicable local law, will be legal and binding obligations of the Company
in accordance with their terms and when sold will be legally issued, fully
paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of the VEL II Account on
Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
April 10, 2000
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: VEL II (93) ACCOUNT OF FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 33-71056 AND 811-8130
Gentlemen:
This opinion is furnished in connection with the filing by First Allmerica
Financial Life Insurance Company (the "Company") of a Post-Effective Amendment
to the Registration Statement on Form S-6 of its flexible premium variable life
insurance policies ("Policies") allocated to the VEL II Account under the
Securities Act of 1933. The Prospectus included in this Post-Effective Amendment
to the to the Registration Statement describes the Policies. I am familiar with
and have provided actuarial advice concerning the preparation of the
Post-Effective Amendment to the Registration Statement, including exhibits.
In my professional opinion, the illustrations of death benefits and cash values
included in Appendix C of the Prospectus, based on the assumptions stated in the
illustrations, are consistent with the provisions of the Policy. The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for a person age 30 or a person
age 45 than to prospective purchasers of Policies for people at other ages or
underwriting classes.
I am also of the opinion that the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the Post-Effective
Amendment to the Registration Statement.
Sincerely,
/s/ Kevin G. Finneran
Kevin G. Finneran, ASA, MAAA
Assistant Vice President and Actuary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 9 to the Registration Statement of the VEL II
Account of First Allmerica Financial Life Insurance Company on Form S-6 of our
report dated February 1, 2000, relating to the financial statements of First
Allmerica Financial Life Insurance Company, and our report dated April 3, 2000,
relating to the financial statements of the VEL II Account of First Allmerica
Financial Life Insurance Company, both of which appear in such Prospectus. We
also consent to the reference to us under the heading "Independent Accountants"
in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 24, 2000
